ian jones presentation

8/7/2019 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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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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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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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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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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Breakdown on Premium Components


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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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Reforms were aimed at reducing the frequency of smallclaims

Source: ICA


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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

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