General insurance reserving

Transcription

3 Selected recent developments 13 September 2011 Jack Straw s 10 Minute Rule bill 2 December 2011 OFT publishes results of Motor pricing investigation 1 January 2012 Police launch first dedicated insurance anti-fraud unit 10 February 2012 MoJ consultation of personal injury lawyer fixed fees under RTA portal 14 February 2012 Valentine s day government summit on motor 1 May 2012 LASPO bill receives royal assent 2 May 2012 Follow-up government Motor insurance summit 31 May 2012 OFT refers credit hire / repair to CC 3

4 Selected recent developments September 2012 Google launched its car insurance service 27 September 2012 Private Motor insurance market referred to the Competition Commission 23 October 2012 Consultation on Ogden discount rate methodology closed November 2012 MoJ unveils RTA fee shakeup 11 December 2012 Consultation on whiplash injuries in England and Wales 21 December 2012 Gender neutral enforcement January 2013 Extension of RTA portal limits may be delayed 12 February 2013 Further consultation on Ogden discount rate issued 4

5 Selected recent developments 1 March 2013 High court hearing for portal challenges 1 April 2013 LASPO implementation Summer 2013 Outcome of the Ogden consultations Summer 2013 RTA portal extension Future? Future? Future? Future? Impact of discount rate changes? Further government legislation? Further equality rulings? Impact of telematics? 5

6 What might we need to take into account this year? Referral fee ban LASPO ATE premium nonrecoverability LASPO 10% uplift in general damages Simmons v Castle Reduction in RTA portal legal costs MoJ Vertical extension of RTA portal MoJ Ogden discount rate change MoJ and others Independent medical panels MoJ Qualified one-way cost shifting LASPO Success fee nonrecoverability LASPO Increase in Small Claims track threshold MoJ 6

7 What might we need to take into account this year? Referral fee ban LASPO ATE premium nonrecoverability LASPO 10% uplift in general damages Simmons v Castle Reduction in RTA portal legal costs MoJ Vertical extension of RTA portal MoJ Ogden discount rate change MoJ and others Independent medical panels MoJ Qualified one-way cost shifting LASPO Success fee nonrecoverability LASPO Increase in Small Claims track threshold MoJ 7

8 Example: RTA portal stage 2 settlement Example 1: Claim size change Example 1: Percentage breakdown of cost 6, % 5,000 80% 4,000 60% 3,000 40% 2,000 1,000 20% 0 Pre-LASPO Pre-April Post-LASPO Post-April 0% Pre-LASPO Pre-April Post-LASPO Post-April General Damages Legal Fees Special Damages & Other General Damages Legal Fees Special Damages & Other Pre-April 2013 claim with 2,000 general damages No recoverable ATE premium, no recoverable success fee, 10% general damages uplift, reduced RTA portal legal costs ~ 20% reduction in claim cost for this claim post-april

9 What can we expect in our 2013 reserving exercises? 9

10 What can we expect in our 2013 reserving exercises? (1) Deterioration in loss ratio KPIs? 100.0% Trend in average written premium 98.0% 96.0% 94.0% 92.0% 90.0% 88.0% 86.0% 84.0% To allow for April reforms 10

11 What can we expect in our 2013 reserving exercises? (1) Deterioration in loss ratio KPIs? 100.0% Trend in average written premium 98.0% 96.0% 94.0% 92.0% 90.0% 88.0% 86.0% 84.0% To allow for April reforms Confused.com / Towers Watson Car Insurance Price Index 11

12 What can we expect in our 2013 reserving exercises? (2) Prior year reserve releases? Reserve releases for 2012 possible (in due course) Likely to be minimal impact for 2011 and prior However 12

13 What can we expect in our 2013 reserving exercises? (2) Prior year reserve releases? Reserve releases for 2012 possible (in due course) Likely to be minimal impact for 2011 and prior However late development of claims We have observed very strong development in the last 12 to 18 calendar months in the reported claim numbers and incurred claim amounts for accident years 2009 and 2010 in particular on a number of Private Car accounts. We understand that this late development has been attributed by those insurers affected to a late wave of claims management company activity... Possible strengthening of some prior years? 13

14 What can we expect in our 2013 reserving exercises? (3) 2013 development pattern and KPI impacts? Q1 Q2 Q3 Q4 14

15 What can we expect in our 2013 reserving exercises? (3) 2013 development pattern and KPI impacts? Q1 Q2 Increase in reported frequency to date Is this simply advanced notification (i.e. a change in development pattern)? Or a genuine deterioration higher ultimate? Or more speculative notifications (anecdotal evidence) that will fall away? Increase in claimants per claim (for similar reasons) and so an increase in average cost per claim but perhaps no change in average cost per claimant for genuine claims? Q3 Q4 15

16 What can we expect in our 2013 reserving exercises? (3) 2013 development pattern and KPI impacts? Q1 Q2 Q3 April reforms not implemented on the same day, so some blurring of impact expected over the first month of Q2 Solicitor business models might be severely threatened by a sharp drop in RTA portal legal costs, personal injury business may become less attractive for them, qualified one-way cost shifting so perhaps a fall in frequency due to a fall in the number of discretionary claims? and perhaps more claims dropping out of the portal? Anticipated reduction in severity of smaller claims (within the RTA portal, i.e. 1,000-10,000 claimant basis) For larger claims, perhaps not a significant impact? Q4 16

17 What can we expect in our 2013 reserving exercises? (3) 2013 development pattern and KPI impacts? Q1 Q2 Q3 Q4 Vertical extension of portal to 25,000 (claimant basis) was originally expected in April 2013 but delayed to this summer, so some blurring of impact over Q3 Larger claims brought into portal process, so similar impact to that seen for smaller claims may be expected on claims development: Timetable for stages of a claim with partial payments at each stage, so advanced development of paid claims Reduced time to settlement, so advanced development of settled numbers and paid on settled claims Legal fees fixed and reduced (to be accompanied by revised legal costs outside of the portal) so reduced severity of claims in the 10,000-25,000 band but perhaps an incentive to inflate claims above 25,000, so increased propensity of claims to make it to the next layer up? Further layers required for analysing injury claims? 17

18 What can we expect in our 2013 reserving exercises? (3) 2013 development pattern and KPI impacts? Hopefully nothing else new to worry about this quarter! Q1 although we might expect continuing distortions in development patterns due to a bedding-in of process changes Q2 Q3 Q4 18

19 What can we expect in our 2013 reserving exercises? (4) Additional costs? Q1 Q2 Q3 Additional cost of a change in the Ogden discount rate Additional cost of claims settling as PPOs Q4 19

21 PPOs what do you need to know? Fundamentally changing UK motor insurance as we know it implications for liability and medical malpractice too 21

22 PPOs what do you need to know? Extremely uncertain 30% 25% 20% 15% 10% 5% 0% PPO reserves (settled PPOs only) as a proportion of UK motor market reserves 22

23 New areas of risk for GI practitioners Interest rate Inflation Mortality Credit Asset matching 23

24 Impacts on all areas of the business Reserving Capital Pricing Investment Strategy Administration 24

25 Stochastic model - an invaluable tool understand, communicate and quantify the risks important to embed decision makers in the process view to be taken on a number of inputs industry slow to adopt 25

26 Hot topics Mortality Reinsurance Discount rate consultations Long Term Guarantees (LTG) package Investment 26

27 Mortality matters Percentage change in PPO estimate 20% 15% 10% 5% Method Longevity - increased life expectancy plus 10 years life expectancy 0% -5% -10% Male Aged 20 at time of settlement 40 year life expectancy 27

28 Mortality quantifying the uncertainty Alternative discount rates 60% Percentage change in PPO estimate 50% 40% 30% 20% 10% 0% -10% 2.50% 0.0% -1.5% plus 10 years life expectancy Longevity - increased life expectancy Method -20% 28

29 Mortality quantifying the uncertainty Changing the discount rate Mortality Discount rate 70% 70% 60% 60% 50% 50% 40% 30% 20% 10% plus 10 years life expectancy Longevity - increased life expectancy Method 40% 30% 20% 10% 0% 2.50% 0.0% -1.5% 0% 1.0% 0.0% -1.5% -10% -10% -20% -20% 29

30 Mortality matters Multi-dimensional Correlated factors Age Discount rate Life expectancy Stochastic model 30

31 Reinsurance Impact is much greater for reinsurers Interesting renewal season Exits from the market and some entrances Uncertainty makes pricing extremely difficult Capitalisation clauses but on what terms? Those with embedded stochastic models at a distinct advantage 31

32 Ogden discount rate Review of rate Announced November 2010 Consultation 1: How to set the rate? Closed August 2012 Consultation 2: Legal framework/more PPOs? Closing 7 May

33 LTG package Solvency II Debate raging in the life industry for some time One of the principal reasons behind SII delays Risk-free discount rate Bank of England real yield curve as at March % -0.50% -1.00% -1.50% -2.00% -2.50% -3.00% -3.50% Maturity in Years 33

34 LTG package Mitigation options do exist Matching adjustment based on the return on assets actually backing the liabilities assets must be ring fenced availability of matching assets? Complicated Onerous 34

35 LTG package General Insurance Industry needs to be represented in the debate Take part in the LTG Assessment Participate in the LTGA exercise but not within the demanding timescales Understand the issues and start planning now 35

36 Investment Net investment income and Underwriting profit for UK market billions Total U/W Result (loss) of Total Investment Return of - 1.9bn 89.3bn Underwriting Profit Net Investment Returns Profit before Tax Source: FSA Returns / Towers Watson 36

37 Investment - Returns cliff? Yield (% pa) Year Yield on gilts 1 to 5 year index Future projected yields Total return gilts 1-5 years Source: iboxx, Towers Watson 37

38 Investment PPO considerations Consider available options Classic trade off between risks and return Long tail Earnings link Management costs SII limitations Competition from pension providers Matching criteria 38