Download - Ian Jones Presentation
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Presented By
Ian JonesDivisional Manager
Aon Risk Services Australia Limited
An Understanding of How Premiums areCalculated and Alternatives
Australasian Universities Risk & InsuranceManagement Society Conference 2005
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How Premiums are Calculated
Property and Business Interruption
General Liability
Motor Vehicle
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Th e role of insurance in society is to increasefinancial certainty in t h e case of catastrop h ic loss
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Market Conditions
12Profits maximised.
Prices stable. Everyoneh appy. .
1Reinsurance availability increases.
Prices start to drop.
2Companies preserve market s h are.
New marketing initiatives.Prices drop furt h er.
3Underwriting disciplines slacken.
Profits reduce significantly.Prices continue to suffer.
4Cover widens at reduced prices.
Ch eap reinsurance.Underwriting losses - profits from
investment income.
5Losses exceed income.
Companies c h asepremium to outrun losses.
6Reinsurers results suffer.
Pricing bottoms out.
7Insurers reunderwrite.Producers in turmoil.
8Capacity crisis.
Reinsurance s h rinks.Prices start to rise.
9ROE still unacceptable.Prices increase s h arply.
10Surplus lines flouris h as
capacity s h rinks.Captives return to popularity.
11Insurers return to profit.
Prices start to peak.
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Th e 21 st Century
World TradeCentre
Ray Williams - HIH
Hurricanes
Concorde
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Market Cycle
Y ears Time
1995 1999 1 Oclock to 5 Oclock
2000 2004 6 Oclock to 1 2 Oclock
200 5 ? 1 Oclock to ?
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Property and Business Interruption
Portfolio premium
Actuarial advice on Expected claim levels Administrative expenses
Desired level of reserves Profit margin
Technical rating
Risk types Location Construction Protection
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Property and Business Interruption
Risk Type Rate (Example Only)
Large Abattoir (Highly Protected) $0.4 5%
Extruded Plastics Factory $0.2 5%
Manufacturing $0. 15%
Educational Institutions $0. 1 0%
Hospitals $0.08 %
Office Buildings (CBD) $0.0 5%
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Property and Business Interruption
Loadings Inferior construction Cyclone / earthquake zones Lack of physical protection Claims history
Discounts High asset values
Strong risk management protocols Sprinklers, hoses, etc Attractive risks
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Property and Business Interruption
Rate applied to declared Property and Business Interruptionvalues.
Example0.1 0% x $1 25 ,000,000 = $ 1 25 ,000(plus GST / FSL / Stamp Duty as applicable)
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G eneral Liability
Public and Products Liability
Long Tail Liability Concepts
Rating Factors
Impact of Tort Law Reform
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Concept of t h e Long T ail of Liability Claims
Public Liability is considered a form of long-tail insurance.
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Concept of t h e Long T ail of Liability Claims
W hilst Public & Products Liability claims are not all thatfrequent, when they do happen the cost is substantial whencompared to consumer claims such as private motor vehicle.
Source: Suncorp
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W h at makes up a Liability Premium?
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W h at makes up a Liability Premium?
Breakdown on Premium Components
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W h at makes up a Liability Premium?
How are Public & Products Liability Insurance Premiumscalculated?
The key influences to calculating Public & Products
Liability insurance premiums are as follows: The type of organisation / industry and its activities
Current or proposed Risk Management practices
The amount of Turnover
The number of employees / volunteers
Past Claims history
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Impact of T ort Law Reforms
Tort Reforms are focused on three main objectives
To clarify and define the rules of negligence, looking at suchissues such as obvious risk, recreational activities and
volunteers;To reduce the number and cost of small low value claimsthrough early notification and reduce legal costs for smallclaims with caps;
To maintain damages for economic loss as well as fullcompensation for large claims.
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Impact of T ort Law Reforms
Reforms were aimed at reducing the frequency of smallclaims
Source: ICA
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Impact of T ort Law Reforms
What about those that are catastrophically injured?
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Motor Ve h icle
Types of Premium Rating methods
Unit Cost basis Motor fleets
Burning Cost basis
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Motor Ve h icle
Unit Cost Basis
Base rate per vehicle, say $400 per unit
Number of vehicles in fleet, say 150 vehicles
Annual premium calculation$400 x 150 = $60,000(Plus GST and Stamp Duty as applicable)
Claims experience discount
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Motor Ve h icle
Burning Cost basis
Annual Premium Calculation, say $60,000
Minimum & Deposit Premium, 75% = $45,000
Adjustable on claims paid and incurred Claims, say $40,000
Adjustment factor 1 00/70
$40,000 x 1 00/70 = $ 5 7,1 43
Less Deposit of $4 5 ,000 = $ 1 2,1 43
Maximum Premium 1 25%
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Met h ods for Reducing Premiums
Retain more risk Higher deductibles / excesses First loss sums insured
Reduce coverage Fire & perils instead of physical loss Motor vehicle third party only instead of comprehensive
Retain certain classes of insurance Machinery breakdown Fidelity Guarantee
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Risk Financing Options
Traditional expense management
Corporate internal fund
Discretionary mutual fund
Captive insurance company / protected cell captive
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Insurance Decision Framework
RESIDUALRESIDUALRISKRISK
SHOULDSHOULDT RANSFERT RANSFER
CANCANT RANSFERT RANSFER
MUS T MUS T RE TAINRE TAIN
Marketswont
Insure or will chargeexcessivepremium
Earnings & Equity Capital cannot stand losses in
this range
Earnings &working capital
can sustainlosses in this
range
Equity holdersmay be willing to chance aloss in this
range
Insurable RiskTolerance LevelInsurable Risk
Confidence Level
Risk Retention Strategy Risk Transfer Strategy
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Allocation of Premiums and Ot h er Costs
Costs
Premiums
Administration
Fees
Deductibles / Excesses
Legal
Uninsured / Self-Insured Risks
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Allocation of Premiums and Ot h er Costs
Provide incentives for loss control
Distribute risk financing costs equitably throughout theorganisation
Reflect loss experience
Stability
Maintain data and documentation
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Q uestions