Insurance premium increases - part two
By John Cragg
In the first part of this article I dealt with several legislative changes which have been introduced in recent years which have all been responsible for significantly increasing both payments made to claimants and also the insurance company’s administrative costs.
All increases faced by insurers have to be paid for - which essentially means insurance premiums must increase. Policyholders seem to have difficulty in understanding why there is the apparent need for large increases across the full range of insurance.
In the last issue I highlighted seven recent changes in law each impacting on premiums. In this final part I will explain a further nine factors which, during recent times, have all contributed to the increased cost of providing insurance and hence to the rising premiums which everyone is currently experiencing.
1. The World Trade Centre attack - September 11th. 2001
This single event led to a focus on insurance and an awareness of our vulnerability. Insurers have to ensure that their financial reserves are more than adequate to meet whatever claims they might sustain. They use a proportion of the premium income to re-insure their risks which, in effect, spreads their risk liability should they sustain a series of large claims.
INSURANCE CAPACITY
The events of September 11th produced claims losses without precedent and it remains possible that some insurers may themselves fail as a result. If this happens it could result in a large reduction in insurance capacity. Re-insurance contracts will need to be renegotiated individually with, inevitably, higher premiums and additional restrictions in the cover provided. It is anticipated that premium increase for re-insurance will average between 25% and 100%. These additional costs will inevitably need to be passed on to the individual policy holders’ in higher premiums.
2. Increased catastrophic losses to property
In recent years there has been an increase in heavy insurance losses due to flooding. (As I write vast areas in Eastern Europe are being torn apart in Eastern Europe.) Large areas in the U.K. have suffered flooding, sometimes repeated flooding.
Flood defence work is unlikely to produce significant protection for several years. In some of the most vulnerable areas protection work is not even due to commence until the year 2010. Financial provision in the expectation of more catastrophic losses has now to be built into the premium rates. An alternative can only be for insurance companies to cease carrying flood risks which would make it more difficult and more costly to obtain cover.
3. Increased frequency of large fire and theft Losses
The record of claims in recent years show large increases in losses due to large fire and theft incidents. Arson appears as a major cause – remember the spate of large school fires that occurred not so long ago?
There have been changes in fire brigade procedures aimed at reducing occurrences of death and injury to firefighters.
Payments for Business Interruption insurance have increased disproportionately due to global trading practices and a greater reliance by businesses on single suppliers.
The theft of new technology, principally sophisticated computer equipment, has led to a substantial increased in claims.
These events have had a major impact on property insurance resulting in a need for a premium rate increase greater than 5%.
4. The emergence of new types of claim
In recent years claims involving stress, violence, abuse, tobacco smoke, sick building syndrome, acoustic shock have all occurred with increasing frequency. These are claims which, by their very nature, are difficult to quantify and deal with.
Claims for stress are particularly frequent – it is said to be the second most reported reason for absence from work, accounting for 20 – 25 % of all absences. Surveys carried out by the Confederation of British Industry say that high numbers of individuals claim stress is a serious problem for them.
LOGICAL CONCLUSION
Stress is not related to any particular company and can arise in any business and behind one claim there is a potential for many other claims if the first claim is successful. The frequency of the type of claim is rising very rapidly – 2001 showed a 40% rise in the number of claims settled compared with the previous year and the payments are also increasing with 19% more paid out than in year 2000.
As I write, today’s paper carries an account of a successful claim made by a patient claiming to have caught a cold whilst visiting his doctor’s surgery. If the courts choose to give credibility to such selfish and unreasonable complaints we may as well resign ourselves to a constant escalation in insurance charges.
Taken to its logical conclusion can we expect at some juncture that Doctors will claim against their patients on the grounds that they are exposing them to multitude of germs, infection and disease? It certainly follows!
In affected cases liability claims in this category has shown an average increase of 20%.
5. Personal injury claims inflation
The cost of settlement of Personal Injury claims is rising at about 9 % p.a. at a time when the Retail Price Index (RPI) is below 3%. For serious injuries the settlement increase rose by 12% (1999 statistics). This means there is a serious discrepancy between insurance income and expenditure and that premiums must increase by more than the current RPI
HEALTH AND SAFETY AWARENESS
The number of claims being made in this category is also rising steeply largely due to the No win-No fee arrangements
(c.f. Part 1) and increased Health and Safety awareness.
Many Employers Liability claims may not be settled for 3 to 4 years and consequently future claims inflation needs to be taken into account.
The recent average settlement of Employers Liability claims has increased at a rate of 5 times the RPI.
6. Motor Insurers Bureau (MIB)
The Motor Insurers Bureau (MIB) was established in 1946 with the principal aim to compensate victims of negligent uninsured or untraced motorists.
All insurers underwriting motor insurance have to be members of the MIB and to contribute to its costs – currently approximately 7% of each motor policy premium written.
According to the Motor Insurers Information Centre – a subsidiary of the MIB - 1 in 20 vehicles are estimated as not having appropriate Motor Vehicle Insurance representing some 1 million individuals who are content to let others ‘pick up the tab’. As an aside, and, whilst appreciating that it is the driver rather than the vehicle that is insured, is it really beyond the wit of man to devise some scheme that would ensure all drivers (and vehicles) have appropriate insurance? Would it not be possible to to adopt a windscreen sticker scheme operated in some countries to confirm that the vehicle and its owner holds appropriate insurance? The present arrangement for obtaining the costly but usually much less expensive road fund licence by presenting a current insurance certificate (expiring in two weeks!) is open to abuse. Could not some scheme be devised whereby the tax disc expiry be linked to – or not extend beyond – the date of expiry of the insurance certificate that is presented? Just a thought.
The cost of the MIB was £215 million in year 2000, £260 million in year 2001 (20.93% increase)It may exceed £300 million in the current year.
As the costs of maintaining the MIB increase so does the necessity of increasing the funding levy charged to the insurance companies which has to be passed on to the premium paid by honest motorists
7. Financial Services Compensation Scheme (F.S.C.S.)
The FSCS is the successor of the earlier Policy Holders Protection Board which was an organisation established in 1975. The primary aim of the FSCS is to help policy holders in the event of a UK insurer becoming insolvent. The current FSCS – like the MIB - is financed by a levy charged to all insurers on all lines of business.
The recent high profile failure of Independent Insurance and of Chester Street Holdings caused substantial payments to be made from the FSCS funds. Consequently premiums have to be increased to meet present and likely future FSCS levies.
All the above are situations which relate to changes in law or the commercial operation of the insurance industry.
Two more items remain which come under a general heading of ‘Economic Factors’ These are:-
8. A Lower Interest Working Environment
At the present time we are in the midst of a low interest period. This means that the interest income that insurance companies are able to generate from their investments is much reduced. The management need to account for the investment income they will receive between the collection of premiums and the payment of claims.
If the total investment income falls as it has substantially in recent years then clearly the company has to compensate
for this, which it can only effectively do
by increasing its premium income.
9. Falling Equity Values
Insurance regulations require that insurance companies hold a certain level of shareholder funds. If, as in current times, share value falls the asset value of the companies also fall, reducing the funds available for supporting the company’s insurance operations. As I write one well known company is seeking to increase its assets by means of a share issue.
MAINTAIN THEIR CAPACITY
Falling shareholder funds mean that the company has to improve profitability by increasing premium rates and/or reducing their capacity within the insurance market. Reducing capacity means that the company will look closely at the extent and nature of the risks of the business they are prepared to underwrite. They may decide to cease to offer insurance in particular area of insurance or they may decide to combine premium increases with reduced or restricted cover.
The year 2001 saw about a 25% fall in the value of the FTSE100 shares resulting in pressure on all insurers to significantly increase premium rates in order to maintain their capacity within the insurance market.
I hope that this account has helped explain why it is that insurance renewals showing substantial premium increases do so for genuine reasons and not –as is sometimes suggested – the result of insurers, brokers, agents etc. being intent on making a ‘quick buck’!
Acknowledgments The Zurich Insurance Company is the principle source of information given in this in this article.
I wish also to acknowledge the help given by HSBC Insurance Brokers Ltd. to ensure the accuracy of the information.