Chapter 9: External influences Flashcards
Latent claim
Claims that result from perils or causes that the insurer is unaware of at the time of writing the policy, and for which the potential for claims to be made many years later has not been appreciated.
Latent claims can also be claims that take many years to be reported
The risk inflation poses to general insurers
If claims on a policy are always for the full sum insured, the insurer will not be exposed to the risk of inflation (even if the sum insured is increased).
The insurer is exposed to inflation risk on partial claims where the sum insured remains the same, but the average claim size increases.
Inflation that affects household contents insurance
retail-price inflation or consumer-price inflation (CPI)
Inflation that affects buildings insurance
Linked to cost of building materials, but labour is major part of claims cost. More likely linked to wages than prices; wages tend to increase more than prices
Loss amplification or demand surge
Where there is a temporary increase in costs of labour or raw materials due to a lrage number of claims being made at the same time.
Inflation that affects motor property damage
Generally for motor repair - supply of parts and labour
Wage inflation
Complete write offs result in larger claims equal to the value of the vehicle - not exposed to inflation as it’s the second hand value of the car
Inflation that affects medical expenses
Persistently higher than most quoted indices - specialist inflation index is used
Reasons why medical inflation can be significantly higher than price or wage inflation
- more advanced medical treatments are used, which are more expensive
- better treatment means patients survive for longer, but still require medical care
- doctors and consultants salaries can rise in excess of average wage inflation
Inflation that affects liability insurance
Liability for property damage may develop in line with the same indices as property damage claims
Claims for personal injusry are more complex.
Components of personal injury claims (“Heads of damage”)
- compensation for loss of income, which will be subject to the same inflation indices as other income-related costs
- costs of medical and nursing care, which is likely to develop according to medical expenses inflation
- awards for pain and suffering, which have tended to become more generous in many countries and have grown at a faster rate than general price or wage inflation (social inflations or superimposed inflation)
Effects on claim size that low economic growth and high unemployment can have
- greater number of claims on mortgage indemnity guarantee insurance, as more homes become repossessed
- more claims from theft and arson, as crime rates increase
- more sttempts to make fraudulent or exaggerated claims (esp. where claims are smaller and cost of checking claims is high). May affect claims severity as well
- increased demand for pecuniary loss cover, as businesses become concerned about the risk of suppliers, debtors, etc becoming bankrupt
Expense inflation
Cost loading for an insurance policy also subject to inflation
Relatively labour intensive industry - may increase in line with wage inflation.
Premiums should increase slightly from year to year to account for expense inflation
Describe the underwriting cycle
- When insurance premiums are high and profitable, more insurers enter the market because they want a share of the profits
- This increases competition which proceeds to drive down premiums
- Low, unprofitable premiums lead to insurers struggling to stay afloat: some insurers become insolvent and leave the market, while others write less business
- This reduces competitive pressures and allows the remaining insurers to increase premiums until business is profitable again
… and the cycle continues …
Hard market
A profitable market where premium rates are high
Soft market
An unprofitable market where premiums are low
Actual mechanisms that reduce the size of the market when it is unprofitable
- companies becoming insolvent
- companies withdrawing as a reaction to unprofitability because of unwillingness to accept continuing loss
- reinsurance being less readily available
Factors that encourage the underwriting cycle’s progress
- the ease with which new entrant can join insurance markets
- the delay between writing business and knowing how profitable it is
- simplistic regulatory capital requirements that encourage insurers to write more business when premium rates are falling and less business when they are rising
- reduced insurance capacity (often following large-scale catastrophes)
- deliberate under-pricing by key players to drive out weaker competition
- pricing strategy being determined by chasing market prices
- economies of scale
Whats factors influence the significance of investment conditions for a general insurance company?
- size of company’s free assets
- amount of business company writes
- size of its in-force business
- length of claim delays (reporting and settlement delays)
- term of the contract
- premium payment method and distribution channels (premiums may be more subjective to delay under some methods/channels)
Court award inflation
In many territories, a decision made by a court can set a precident for future court awards, ie in similar cases, and for cases where the parties involved agree to settle out of court. The effect is very similar to that of inflation. The effect of judicial decisions is often referred to as “court award inflation”
Differences between court award inflation and price inflation
- court inflation, historically, has been higher than price inflation
- court inflation tends to remain level for a period, then increase in sharp jumps when new precedents are created
- court inflation is less predictable than price inflation
Jurisdiction shopping
Where the claimant will try launch proceedings in most claimant-friendly jurisdiction to maximise any potential award.
Ways in which it has been observed that compensation has become more generous
- courts may be more willing ro accept that there is liability for a victim’s suffering (and even that suffering exists)
- given that they decide there is liability, the courts may award larger amounts for similar losses
The impact that legislative changes will have on claims experience will be difficult to predict in what ways?
Difficult to predict:
- the degree to which legilation will be enforced
- the extent to which people will adhere to the new laws, which depend on social attitudes of people twards law enforcement/safety measures and extent to which new laws are publicised
Reasons that cases that might be successfully litigated are never brought
Possibly because victims:
- are unaware of their rights
- do not know about the process
- do not want to dwell on past miseries
- are not sufficiently motivated to go through the process
High total cost of insurance claims from weather-related events in the USA compared to other countries can be attributed to:
- large number of properties in certain areas, particularly cities along the eastern coastline
- high average value of these properties
- high proportion of properties that are insured
Reasons for rising costs of major losses
- largely due to economic development
- general trend towards insurance in developed economies
Man-made catastrophes
- terrorist incidents
- industrial accidents
- conflagrations
Conflagrations
A large destructive fire that is difficult to control
Problems with latent claims
- impossible to know wherethe potential claim is lurking
- if a claim does materialise, the future claim cost is completely unknown
- problem of identifying exactly when the claim event occured
- problems of definition - which insurer is liable?
Examples of court awards
- the admission of certain claim, and the amounts at which they will be settled
- relating to imprecise policy wordings that can lead to the admission of new types of claim that had not been allowed for in the costing. Liability claims are particularly exposed to this type of risk
- setting new levels of award or compensation for existing categories of claim
Montreal Convention
An international treaty which sets out airlines’ liabilities for passengers and their baggage. Changes to this treaty are thought to have raised awareness of the fact that countries that have not signed up to the agreement may have arrangements that are more favourable to claimants, and these are the jurisdictions that people tend to try and claim under.
Societal attitude
A way in which we think of and behave towards others in our community
Notable examples of changes in societal issues
- drink driving
- crime rates
- attitude of people towards insurance
- organisations encouraging the placing of claims
- staged accidents
Inflation and economic factors
- claims inflation
- underwriting cycle
- investment conditions
- currency movements
Legal, political and social factors
- court awards
- legislation
- trends in behaviour and awareness
Climate and environmental factors
- weather
- catastrophes
- latent claims
