Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

The General Insurance Market in New Zealand - Changes that have

taken place during 2001/2002

Janet Lockett

New Zealand Society of Actuaries Conference

Rotorua - November 2002

Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

Year 2001 was ...

“... one of the most traumatic in the history of international insurance and will define

much of the insurance thinking and planning for decades to come.”

Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

Thanks

Many thanks, for providing valuable input and assistance, go to:

Andrew, Chris, Duncan, Fiona, John, John, Karl, Lynda, Paul, Peter, Phil, Richard, Rob and Rod

Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

Special features of the NZ general insurance market

Size, development, location ACC EQC Regulation

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The Insurance cycle

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The Insurance cycle

1980 1990 2000

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Situation in 1999/2000

Deteriorating claim features Large losses Continuing competition Reduced investment returns Some premium increases, but

still under-priced still slack underwriting

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September 11

Estimated insured losses US$ bnProperty - World Trade Centre 3.5

- Other 6.0Business interruption 11.0Aviation - Hull 0.5

- Liability 3.5Other liability 10.0Workers’ compensation 2.0Life 2.7Other 1.0Total US$40.6 bn

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Other aspects and consequences

Economic losses Stock markets Solvency of insurers/reinsurers Return to basics

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Basic principles

Good information Underwriting standards Pricing Return on capital Relationships Risk management

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What is an insurable risk?

The circumstances of a loss event and the amount of a loss must be able to be clearly defined

The occurrence of a loss must be the result of chance

The frequency and severity of a loss must be quantifiable

It must be within reasonable limits

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Good underwriting procedures

Good data Clear policy conditions Detailed information about each risk Detailed analysis of experience

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Are terrorism risks insurable?

Can the possible circumstances of a loss event and the amount of a loss be clearly defined?

Will a loss be the result of chance? Can the frequency and severity be

quantifiable? Is the risk within reasonable limits?

Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

If terrorism risk is to be insured -

Should it be provided by the private sector, or the public sector, or a combination of both?

Can it be both widely available and generally affordable?

Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

Are terrorism risks insurable?

Is terrorism insurable - but only on the same terms as war risks?

Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

Risk management cycle

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Risk management cycle

IDENTIFYWhat risks

exist

ADMINISTERAnalyse, monitor

QUANTIFY & CONTROLMitigate, reinsure, risk

share, restrict

FINANCEPrice appropriately,

hold capital

Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

Return on equity

New capital - new RoE requirements Implied combined ratios Past performance

85.0

90.0

95.0

100.0

1992 1996 2000

CR%

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Basic principles

Good information Underwriting standards Pricing Return on capital Relationships Risk management

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Commercial property and business interruption

Data Policy conditions Earthquake cover Reinsurance Pricing the risk Relationships - risk management

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Liability

NZ vs overseas Availability Data Policy conditions Pricing Relationships - risk management

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Motor

NZ vs overseas Commercial motor Private motor Factors affecting costs

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Householders and other business

Data Aggregation of risk Other factors Pricing

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A flatter insurance cycle?

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The Future:

Keep on applying the basics or return to competition?

Will standards fall? Will the insurance cycle continue

and if so, will it be flatter?

Melville Jessup WeaverA Towers Perrin/Tillinghast Affiliate

The Future:

What will the reinsurance market be in some years time?

Will ART become more important in global insurance markets?

How might ART affect the NZ market?

What about captives?

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Regulation of general insurers

Ratings Solvency Risk margins Powers of intervention by regulatory

authorities

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Accounts and tax

Accounting standards Taxation

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Actuarial Control cycles

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Actuarial control cycles Data analysis Premiums Reserves and risk margins Capital allocation and RoE Asset/liability modelling Risk management

Actuaries can add value

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Closing thoughts

Have insurance markets suffered severe shocks in the past and survived?

Does the industry learn from its experiences and develop new strengths?