31 Annual GIRO Convention

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31
st

Annual GIRO Convention

12
-
15 October 2004

Hotel Europe

Killarney, Ireland

Current Developments in the Irish
Insurance Market

Joe Kennedy

Ger Bradley

David Costello

Questionnaire


What is the current issue that you think is the most important and should be discussed?

(in 10 words or less please)


David will collest you answers from you now
-

before we put our agenda up!


An Aside


the Insignia of the SAI


The "t"
-



William Sealy Gossett


1899 to 1935 work for Guinness, Son and Company in Dublin


Wanted to derive statisically valid conclusions from to small samples


Therefore invented Student “t” test


Guinness is officially Good for Actuaries


The Hour Glass
-

taken from the Institute of Actuaries’ insignia.


The Harp
-

representing Ireland.


The Owl
-

taken from the Faculty of Actuaries’ insignia. The second
and fourth sections represent the fact that actuaries qualify in Ireland by
becoming Fellows of the Institute of Actuaries in London or of the
Faculty of Actuaries in Edinburgh.


Current Developments in the Irish Insurance
Market


Questionnaire (DC)



Recent market Results & Trends (JK)



PIAB (GB)


Paper to IFRSA (Irish Regulator) on role of Actuary
in General Insurance (GB)



Statement of Actuarial Opinion (DC)


Peer Review (DC)


International Issues (DC)


Current Developments in the Irish Insurance
Market


Recent market Results & Trends


PIAB


Paper to IFRSA (Irish Regulator) on role of Actuary
in General Insurance


Statement of Actuarial Opinion


Peer Review


International Issues


Market Trends


Population

Irish Population in millions
3.7
3.8
3.9
4
4.1
1999
2000
2001
2002
2003
2004
Market Trends


Vehicles

Market Results


GWP

2003 GWP



4,239m … (

3,954m in 2002)



Motor



1,895m


Property


1,158m


Liability



860m


PA/ Travel



77m


Other classes



250m

Market Results
-

GWP

Market Share by Company
Hibernian
22%
Allianz
14%
AXA
13%
RSA
11%
Eagle Star
9%
FBD
9%
Quinn-Direct
7%
Others
15%
Market Results
-

GWP

Market Share Comparison
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Hibernian
Allianz
AXA
RSA
Eagle
Star
FBD
Quinn-
Direct
Others
2001
2002
2003
Market Results


Underwriting Result

Net Underwriting Result 1992 - 2003
-500,000
-400,000
-300,000
-200,000
-100,000
0
100,000
200,000
300,000
400,000
500,000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Net Underwriting Result
U/W Result % NEP
Market Trends


Premium Levels

“Insurance Premiums Have Fallen to 2000 Levels”

… IIF press release, 16
th

July



“If the recent AA survey is taken into account, which found
reductions of 22% in the past year, motor premiums are already back
to 1999 levels.”



a representative of the Construction Industry Federation stated in its
evidence to the committee that its members, “are generally
experiencing a 25% drop in renewal premiums. Furthermore, firms
that had great difficulty obtaining a single quote in 2002
-
03 now seem
to be able to get three to four quotes when renewing a year later.




Market Trends


Severe Weather

Forecast this!



1997


December


Storm

84m


1998


December


Storm

56m


1999




2000


November


Flood

51m


2001


December


Freeze

30m


2002


February


Flood

37m, November


Flood


2003




2004



Market Trends


Weather

Cumulative Rainfall in mm - Dublin
0
100
200
300
400
500
600
700
800
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2004
2003
mean
Market Trends


Weather

Cumulative Rainfall in mm - Valentia
0
200
400
600
800
1000
1200
1400
1600
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2004
2003
mean
Market Trends


Road Deaths

Road Collision Statistics
0
4,000
8,000
12,000
16,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
300
350
400
450
500
Injured
Killed
Market Trends


Hospital Admissions

“Hospital admissions fall 36% after penalty points”

… Irish Times 1
st

Sept



Road traffic accidents, Cork University Hospital, 1
st

year


“We have noticed that the number of attendances seems to
be on the way up again. I guess the honeymoon period is
over”

… Dr John Street, senior specialist registrar orthopaedics


Market Trends


Workplace Accidents


However we are pleased to see a reduction of 15% in
the rate of injuries and ill health for workers since
1999. Ireland now has the lowest rate of injuries in the
EU and I have no doubt this has been due to our
continued ability to meet our key objectives. I am
confident the Authority will continue to do so in 2004
.”

… Frank Cuneen, Chairman, HSA

Market Trends


Fraud

“We Irish are renowned for issuing proceedings”

… Irish Examiner, 24
th

September



PrimeTime Special


Insurance Confidential


Sworn Affidavits


False or Exaggerated claims …

100k/ 10 years



ESA
-

Equal Status Act


Irish Legislation


11 grounds incl. Age & Gender



Market Trends


PIAB

“New Personal Injuries board leads to rise in court
awards”

… Sunday Business Post, 22
nd

August



“We believed that if PIAB was to be successful, it had to
offer generous damages


and that would have a knock
-
on
effect on court awards.”

… Hugh Mohan, chairman of the Bar Council


Current Developments in the Irish Insurance
Market


Recent market Results & Trends


PIAB


Paper to IFRSA (Irish Regulator) on role of Actuary
in General Insurance


Statement of Actuarial Opinion


Peer Review


International Issues


PIAB
-

the process


Claimant rings 1890 number based on Cork


Will be asked whether the respondent (policyholder) has been put on
notice


must do so first


If OK


brought through process


and sent claims form incl. medical
report form from their treating doctor


PIAB will then send the respondent an informal notice of claim


The PIAB will wait full documentation from claimant (+

50) before
officially registering the claim


when this is done


the statute will go on
hold


When so registered, PIAB will send respondent a copy of all
documentation received


and insurer major documentation only


Respondent has 90 days to advise whether the case is one for assessment
by PIAB or not


PIAB does assessment only cases


if Liability is in dispute


won’t
handle

PIAB
-

the process


If the Respondent (& Insurer???) is happy for PIAB to handle, then the
insurer should send the fee for

850 to PIAB


If no word is received then PIAB will assume liability is admitted


If it is believed to be a try
-
on, then the insurer should handle themselves


If Respondent / Insurer refuse to allow the claim to proceed, then the
claimant will be issued with a release letter


The insurer is free to settle the claim within this 90 day period, and indeed
any time after the 90 days (but if after 90, upfront fee is payable)


PIAB
-

the process


The PIAB have to make an assessment within 9 month of registering a
claim


can have an extension of a further 6 months by agreement


If they feel it unsafe or premature to issue an assessment at this stage,
intend to issue a release certificate at this stage (back problems …)


Once PIAB have made an assessment


claimant has 28 days to accept,
respondent has 21 days

PIAB
-

the Result


Should eliminate all legal fees on non
-
complicated assessment only cases
on EL, PL & Motor



But



Now for the “cup is half empty” story . . .

PIAB
-

the possible Downside


Civil & Liabilities Courts Bill requires judges to take account of PIAB Book of
Quantum (BOQ)


But BOQ generally believed to be about 1/3rd more than average settlements on
lower cost claims


Believed to be too light at upper end


where it is assumed courts will stay with
current values
-

as “shall not operate to prohibit a court from having regard to
matters other than BOQ”


What will happen those in between
-

rising tide . . .


Impact existing cases and new cases


Could fuel increasing frequency of low value claims as Joe Public hears the good
news


The wide range in the BOQ gives courts scope to inflate medium severity cases
while still staying within the bands



PIAB
-

the possible Downside


Respondent decides whether a case goes to PIAB or not


This is the policyholder


The MIAB were very critical of insurers settling against insured’s wishes
-

this
looks like the device to address this concern


Most drivers do not accept responsibility for accidents
-

so into the court we go at
the
policyholders

discretion


PIAB
-

the possible Downside


Current Legal challenge to PIAB


Right to legal representation


Courts likely to uphold


Could be a constitutional issue
-

referendum
-

messy


This will introduce legal costs into PIAB


Lawyers will then be reluctant to engage in “no
-
fee” pre
-
PIAB negotiations
-

which if successful protected the industry from court appeals from PIAB


Lawyers can then have 2 bites at the cherry
-

both with fees


Only way for PIAB to avoid appeals is to up the settlements, this in time will up
the BOQ values
-

which will feed into the courts
-

vicious leap
-
frogging circle ...




PIAB
-

the possible Downside


IIF study shows that legal fees on motor injury cases have gone from 38% in 2001
to 41% in 2003 (for EL gone from 45% to 52%)


Average damage values were dampening
-

this was felt to be the way to get the
same monetary income from these cases


If damages go up as speculated in previous slides
-

no doubt the percentage costs
will not decrease to previous levels


As reflected in the above costs increases, the taxing masters have been
increasingly generous to lawyers
-

unlikely to change spots now

PIAB
-

the possible Downside


Summary


CLCB & BOQ

=> increasing lower and middle range awards





=> increasing claims frequency soft tissue / whiplash



Proces so easy

=> increasing claims frequency soft tissue / whiplash



Respondent


=> very few motor claims
-
> PIAB



Leagal Representation

=> legal fees in PIAB + higher costs & Freq



Rise in legal fees

=> higher awards, higher frequency, higher legal fees

PIAB
-

the possible Downside


Summary


All in the garden is not rosy!!!


I sincerely hope PIAB works


The general consensus which I share is that the PIAB will work


Great political will to get it this far so quickly


That will is still there
-

if there are hick
-
ups


But the lawyers have not gone away you know


There is a significant downside risk
-

history has taught us that

PIAB
-

the possible Downside






Questions / Observations ???

Current Developments in the Irish Insurance
Market


Recent market Results & Trends


PIAB


Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Statement of Actuarial Opinion


Peer Review


International Issues


Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


IFSRA established on 1st May 2003


Responsible for regulation of all financial services firms in Ireland


Also has an important consumer protection role



Paper presented to IFRSA Jan 2004
-

authored by members of GI
committee of SAI, and approved by Council of SAI


Impetus for Paper


came from an informal discussion between a delegation from the SAI and
IFRSA
-

it would be nice if you prepared a brief paper on ...


Purpose of paper


provide a brief overview of actuarial involvement in management of non
-
life insurance


consider potential role for actuaries in future regulation of non
-
life sector

Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 1
-

History of actuarial involvement in non
-
life


Section 2
-

Reserving


Section 3
-

Pricing


Section 4
-

Corporate Risk management etc.


Section 5
-

Prudential supervision
-

International approaches


Section 6
-

Available options for future supervision in Ireland


Section 7
-

Considers present and future statutory role



Going to skim very quickly over chapters 1 to 6 (available on
Internet)


Idea is to exchange views on proposals in Section 7



Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 1
-

History of actuarial involvement in non
-
life


Up to early 80’s no involvement in Ireland (60’s UK
-

Johnson & Hey
1968)


Introduction of non
-
Life Directive 1976
-

more systematic approach to
reserving


Collapse of PMPA 1983 & ICI 1985 help actuaries get a foot in!


Internationally life assurance from the beginning was based on
actuarial principles


Many of the classes written by GI companies were much riskier


Looked on a short
-
term
-

therefore could adopt a more ad
-
hoc
approach


Therefore financial consequences of a non
-
actuarial approach
appeared limited!


About 50 non
-
life actuaries in Ireland
-

about 25 Direct Domestic, 20
RI/Captive, and 5 in consultants

Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 2
-

Reserving


Key Role


Communication with claims and legal v imp


Variety of statistical techniques


Judgement of experienced actuary, understanding of
methodologies, knowledge of underlying data and processes of
undertaking


Blind application of any statistical method can produce
misleading results


The most appropriate method depends on nature of underlying
data


Various reasons for calculating claims reserves
-

the purpose of
the exercise is a factor in the level of prudence used

Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 3
-

Pricing


Return on Capital


state of cycle


appetite for growth


volatility of class


a decision of account owners
-

UW’s and CEO


Pricing Basis


Expected Claims Cost


Claim Handling


RI premium and recoveries


Commission


ROC & Investment Income

Statistical Analysis of past claims, relevant


exposure and rating factors

Same ROC on all segments?

Statistical confidence at segment <<100%

Resulting essence of competition

UW Judgment the larger the policy

Experience Weighted Quotations

Deductible Pricing E&E or Agg

Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


What are key risks deserving senior
management attention?


What is the optimal profile of assets /
liabilities?


How much capital is needed and how
allocated per class?


How should we assess the
performance of each segment?


Optimize RI programme


How should we measure non
-
financial
risks?


How to Maximize ROC?



Section 4
-

Corporate Risk
Management


capital management


business planning


operational risk assessment


Operational Risk is an area where
methods are only now developing and
data just being collected


Actuaries involved in modelling these
risks and their relationships using
simulation tools


Extreme events are scenario tested


The questions actuaries seek to
answer are:


Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Actuarial Certification has been
introduced in a number of countries to
provide early warning signals


The following US based table shows
the reason for US failures
-

many of
which are due to reserve problems






Section 5
-

International Non
-
Life
Prudential Supervision


International Failures of GI companies
are not rare
-

the following shows the
annual default rate of UK GI & RI
undertakings:



Source: Sigma, FSA, own calculations
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
Main causes of insolvency *
Insolvencies
In %
Insufficient reserves/premiums
Too rapid growth
Catastrophe losses
Overvalued assets
Failure of ceded reinsurance
Subsidiaries
Significant change of core business
Fraud
Total
143
86
36
40
22
26
28
44
425
34%
20%
9%
9%
5%
6%
7%
10%
Underwriting Risk
-
63%
Asset Risk
-
14%
Operational Risk
-
23%
* excludes 213 non
-
identifiable and miscellaneous
Source: AM Best (US insolvency) own calculations
Main causes of insolvency *
Insolvencies
In %
Insufficient reserves/premiums
Too rapid growth
Catastrophe losses
Overvalued assets
Failure of ceded reinsurance
Subsidiaries
Significant change of core business
Fraud
Total
143
86
36
40
22
26
28
44
425
34%
20%
9%
9%
5%
6%
7%
10%
Underwriting Risk
-
63%
Asset Risk
-
14%
Operational Risk
-
23%
* excludes 213 non
-
identifiable and miscellaneous
Source: AM Best (US insolvency) own calculations
Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 5
-

International Non
-
Life Prudential Supervision

(cont)


Insolvency has social and economic consequences.


PMPA: concern that reduced insurance capacity would lead to severe
difficulties in obtaining coverage and an increase in uninsured driving


HIH in Australia led to a severe reduction in insurance capacity in some
sectors of the economy and to cessation of building work in New South Wales
for some time.


Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 5
-

International Non
-
Life Prudential Supervision

(cont)


UK: Lloyds introduced actuarial certification of syndicate reserves when
Equitas (the Lloyds rescue vehicle) was established


Outside of this “Freedom with Publicity”
-

required to provide detailed
statistical information on a public basis


Can require companies to have actuarial reviews performed e.g. Weavers,
which shortened the insolvent trading period & saved the tax
-
payers money


Now moving towards capital adequacy models (ICA’s)


US: Actuarial certification in place for many years


Report must be made available to the board, though only mandatory to
present it to board in Florida

Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 5
-

International Non
-
Life Prudential Supervision

(cont)


Canada: appointed Actuary for Life & Non
-
Life


to

report

on

the

company’s

insurance

liabilities

on

an

annual

basis


to

submit

an

annual

report

to

the

regulator

on

the

current

and

expected

future

financial

condition

of

the

company


to

report

on

any

matters

that

may

have

an

adverse

effect

on

the

company’s

solvency
.


The

annual

investigation

examines

the

sensitivity

of

the

company’s

solvency

position

to

changes

in

the

economic

environment

and

changes

in

claims

experience,

amongst

other

factors,

using

the

techniques

of

“dynamic

solvency

testing”
.



The

Canadian

Institute

of

Actuaries

has

produced

professional

guidance

covering

the

types

of

sensitivities

that

should

be

tested
.



Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 6
-

Philosophy of Insurance Regulation in Ireland


IFSRA has 2 potentially conflicting roles
-

prudential supervision and
consumer protection


Prudential supervision:



“no failure” approach



“freedom with publicity” (the traditional Anglo Saxon model)


a non
-
interventionist stance (caveat emptor), as applies to Reinsurance


Choice may depend on markets being served
-

personal lines etc.


Issue of harmonization within EU & globally
-

Basel II accords
-

may bring
greater consistency between non
-
life, life & banking supervision


Have to consider delegation, the cost and who pays




Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 6
-

Philosophy of Insurance Regulation in Ireland (cont)


Consumer protection


Permissive


(frequently referred to as a “normative” approach)


relies on market competitiveness, commercial and entrepreneurial motives to
ensure customer interests are met.


In this scenario, the regulator typically monitors market operation and regulates
distribution, the sales process and communication with customers.


Prescriptive:


A prescriptive approach may require insurers to submit some or all of the
following; details of products, marketing materials, policy wordings and rates.


The regulator may require this to be done on a “file and use” basis, or may require
that regulatory approval is obtained


Tariffed markets were abandoned in the UK and Ireland some 20 years ago


Profit margins have reduced in the period tariffs were abandoned



Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 7
-

Present and Future Statutory role of Actuaries in Ireland


The current statutory role for the actuary in non
-
life insurance is limited to the
provision of an annual Statement of Actuarial Opinion (SAO); this was first
introduced in 2001.


The SAO certifies that the reserves, gross and net of reinsurance, are greater
than the actuary’s best estimate of the liabilities as at the reporting date.


The actuary is not required to consider the interrelationship between the
liabilities and the corresponding assets, the nature of the reinsurance
programme or the overall solvency position.


The SAO is a “point
-
in
-
time” opinion and the actuary is not required to
monitor the position on an ongoing basis or to model the expected position at
any future date.



Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 7
-

Present and Future Statutory role of Actuaries in Ireland (cont)


If

IFSRA

wished

to

extend

the

statutory

role

of

the

reporting

actuary,

this

could

potentially

be

done

in

the

following

ways
:


The

SAO

could

be

extended

to

include

an

opinion

on

the

overall

solvency

of

the

company

at

the

reporting

date
.



This

requirement

could,

over

time,

be

extended

to

continuous

monitoring

of

the

solvency

position

throughout

the

year
.



The

SAO

could

be

supplemented

by

a

periodic


financial

condition

report


-

which

would

analyse

the

potential

future

development

of

the

company’s

solvency

position
.



Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


Section 7
-

Present and Future Statutory role of Actuaries in Ireland (cont)


Prudential

supervision

of

non
-
life

insurance

could

be

strengthened

by

extending

the

statutory

role

of

actuaries
.



Necessary

and

appropriate

to

do

so

in

a

series

of

incremental

steps,

in

the

order

outlined

above
.



The

current

system

of

SAOs

is

of

relatively

recent

origin

and

it

would

be

desirable

that

it

be

given

some

further

time

to

mature

and

consolidate
.



There

could

potentially

be

resourcing

issues

if

further

statutory

requirements

were

introduced

within

a

short

timeframe
.



It

would

also

be

appropriate

to

consult

with

the

industry

and

other

stakeholders

in

relation

to

any

extension

of

the

statutory

actuarial

role
.


Paper to IFRSA (Irish Regulator) on role of
Actuary in General Insurance


DISCUSS


Extend the role to . . .



the

overall

solvency

of

the

company

at

the

reporting

date
.



continuous

monitoring

of

the

solvency

position

throughout

the

year
.




financial

condition

report


-

future

development

of

the

company’s

solvency

position
.



Current Developments in the Irish Insurance
Market


Recent market Results & Trends


PIAB


Paper to IFRSA (Irish Regulator) on role of Actuary
in General Insurance


Statement of Actuarial Opinion


Peer Review


International Issues


Statement of Actuarial Opinion
-

SAO

The Professional Affairs Committee are looking at
the operation of the SAO



How is it working?


Signing Actuary Capacity


Varied Perceptions on eligibility


Are the conditions too restrictive?


Survey on working of SAO has still to be done


General Insurance Board will give this to the
Professional Affairs Committee


SAO
-

Numbers of Signing Actuaries

Split of Signing Actuaries into
Company/Consultant and where based







Not all Company actuaries are based in Ireland


We are heavily dependant on UK consultants



Company
Consultant
Ireland
3
UK
20
8
SAO
-

Soft Close at end of April

IFSRA has asked that returns be made
electronically by end of April



Hard Copies are still only required for end June


70
-
75% of companies complied with this


Those who did not were asked for reasons by IFSRA


Pressure to complete the blue book quicker


It is difficult to change figures after submission


Need to form an opinion before end April




Current Developments in the Irish Insurance
Market


Recent market Results & Trends


PIAB


Paper to IFRSA (Irish Regulator) on role of Actuary
in General Insurance


Statement of Actuarial Opinion


Peer Review


International Issues


Peer Review
-

Survey


Following the defeat of the Peer Review Motion a
survey was taken from the members



The results have still to be interpreted



However things have moved on and there is not so much
pressure on the General Insurance area given that the
reserves are subject to audit

Peer Review
-

Other Developments


Other Areas have moved on so there is no going
back to old Peer Review Motion



Discussions with IFSRA are taking place on the role of
the appointed actuary on the life side


The Pensions Board have indicated that they are not happy
with the current arrangement


Morris Review Recommendation due


GI area likely to wait to see what happens

Current Developments in the Irish Insurance
Market


Recent market Results & Trends


PIAB


Paper to IFRSA (Irish Regulator) on role of Actuary
in General Insurance


Statement of Actuarial Opinion


Peer Review


International Issues


International Issues



Movement to IFSRA from DETE


18 New Non
-
Life Authorisations in 2003


Speed of Authorisation


The authorisation process is “relatively” quick here


IDA Restructure and Development Plans


Consultants to advise on global trends and prospects

International Issues



EU Fast Track plan to regulate reinsurers


IFSRA keen to regulate but sensitive to market


Have committed to wait until EU Directive finalised


Deadline is the end of this year but as discussions are
still taking place likely to move to next year



Reliance on other countries’ legislation


US companies, in particular, like Ireland


Are we over
-
reliant on this business?


31
st

Annual GIRO Convention

12
-
15 October 2004

Hotel Europe

Killarney, Ireland