The Insurance Crisis – How To Achieve Sustainable Premiums

By

Rod Hughes

Australian Yachting Federation

Insurance & Risk Management Seminar

8th June 2002

The Situation

• Dramatic increases in liability insurance premiums, or even unavailability of cover

• Impacting on wide range of organisations – sporting bodies, event organisers, community organisations in addition to commercial business operators

• Enormous effect on Australian society – situation reaching crisis point

The Cause

• Prime consideration in setting premiums is risk exposure– Claims history– Potential for claims in future policy period

• Substantial underwriting losses to insurers on liability cover e.g. loss ratio in 2000 of 134% i.e. claims incurred 134% of premiums received

1996 1997 1998 1999 2000

Gross Premium Revenue ($M) 753.5 723.9 786.1 857.6 883.3 Claims Expense (M) 536.5 749.8 1,070.9 1,234.1 1,182.7 Gross Loss Ratio (%) 71% 104% 136% 144% 134%Underwriting Expenses ($M) 174.8 189.6 213.9 217.8 238.5 Underwriting Result ($M) 42.2 215.5- 498.6- 594.3- 537.9- Investment Revenue ($M) 191.2 257.8 199.9 247.1 338.6 General & Administration Expenses ($M) 19.6 20.3 29.0 30.7 29.2 Gross Profit ($M) 213.9 22.1 327.8- 378.0- 228.5- Number of Policies ('000) 1,812 n/a 2,595 1,143 1,144 Number of Claims Reported ('000) 48 n/a 56 72 88 Claims Reported % to Policies Issued 3% n/a 2% 6% 8%

Public and Product Liability Insurance in Australia, 1996 to 2000

Liability Claims Expense

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1996 1997 1998 1999 2000

$ M

illio

n

Liability Underwriting Result (Premium less Claims less Underwriting Expenses)

-700.0

-600.0

-500.0

-400.0

-300.0

-200.0

-100.0

-

100.0

1996 1997 1998 1999 2000

$ M

illio

n

Number of Liability Claims Reported

-

10

20

30

40

50

60

70

80

90

100

1996 1997 1998 1999 2000

Thou

sand

s

Justification??

• Future trends – “long tail” nature of liability claims

• Risky business – potential for significant loss• Unsatisfactory results – shareholder demand for

returns – associated events e.g. September 11, HIH

• Does potential benefit justify the insurers risk??

Suggested Actions Include

• Capping of claims / Rights of the individual• No fault scheme as in New Zealand / Financial

problems, constitutional/political constraints• Contingency fees / affordability for all, annual

decrease in court lodgements• Disclaimers, Waivers / Trade Practices legislation• Insurers settle rather than fight / commercial cost

effective decision

• Very complex matter – no single simple solution

• Will require cooperation and determination of all parties involved

• Will not be solved overnight

• The key to reducing liability premiums is to reduce liability claim payments

As sport administrators, what can we do?

Group Pooling?

• Premiums based on actuarial calculations – incident rate, average cost of claims

• Once sufficient numbers to prevent distortion, extra numbers do not reduce the risk

• Extra numbers may provide higher risk• The lure of extra premium has contributed

substantially to the current situation e.g. demise of HIH

Group Pooling With Self-Insurance?

• Mutual pooling of funds to meet the cost of claims – re-insurance to protect against shortfall

• Lower allowances for expenses and profit

• Must be based on very sound foundations, including detailed claims data

• Does not reduce claims risk

Reduce Incident Rate, Reduce Average Cost of Claim

• Critical to reducing the cost of liability insurance – must happen for there to be sustainable premium reductions

• Actions taken that do not have the effect of reducing the incidence and/or cost of liability claims will have limited influence

• Group pooling in isolation will have limited impact

Risk Management

• The broad terminology used for programs that will reduce incidence rates and/or the average cost of claims

• Any pooling actions must be linked to effective risk management to gain benefit

• Mandatory standards for all involved• Internal and external audit• Requires education, training and resources

Risk Management …..

• Most liability claims in sport involve personal injury

• Injury data collection – “if you do not measure it, you cannot manage it”

• Injury intervention strategies – measured for effectiveness

• Room for considerable improvement

Best Practice Management• Effective risk management infrastructure• Sector taskforce to oversee operations of compliance to

maintain a best practice mechanism• Injury data collected and utilised in prevention

campaigns• Recognition by insurers that their ratings will be

reflective of clients adherence to best practice and industry standards

• A commitment from all parties concerned to be prepared to give some ground in the knowledge that more of the same is not a viable proposition