How does claims inflation affect premium?

James Bean Managing Director, Standard Europe Naples, 16th October 2015

• ‘ordinary’ inflation – definition and measure

• claims inflation – what it is and why it is important

• how does claims inflation affect premium?

• mitigation

02

Introduction

03

‘Ordinary’ inflation

Definition: sustained increase in the general price level of goods and services in an economy over a period of time.

Measure: usually measured by monitoring the price for an average basket of goods and services over time.

04

Claims inflation: what is claims inflation?

Photo: Shutterstock

• promise to indemnify the insured following a loss caused by an insured peril, subject to any limits, for an upfront premium

• therefore, the product sold by an insurer is the future payment of claims

05

Claims inflation: the context

• amount by which claims

- increase in number (frequency)

- increase in value (severity)

• product of the two variables – expressed as an annual percentage

06

Claims inflation: measure

Increase in number

X Increase in value

= Annual claims inflation

• compared to recent years, claims over last 12 months have been relatively benign: why?

- reduction in world trade

- improvements in loss prevention

- technology

- scrapping of older tonnage

07

Claims inflation: frequency

• however, claims environment generally continues to be hostile to ship owners: why?

- “compensation culture”

- intervention of authorities

- direct action against the Clubs

- increase in liability under conventions

˃ Example: 51% increase in liability limits under the LLMC 1996 Protocol took effect from 8 June 2015

08

Claims inflation: severity

9

Claims inflation: known unknowns

“As we know, there are known knowns; these are things that we know we know. We also know there are know, unknowns; that is to say we know there are some things we do not know. But there are also unknown, unknowns; the ones we don’t know we don’t know.” Donald Rumsfeld, UD DoD, 12 February 2012

In the current economic environment, inflation and claims inflation is only

likely to head one way – north!

• important metric for pricing long tail liabilities

• influential factor in reserving, planning and setting capital requirement

• neglect of claims inflation by insurers who face low returns on investment and a softening market, could result in a nasty surprise

010

Claims inflation: importance

“Claims inflation constitutes a threat to both the profitability and the security of insurers worldwide” The Actuary, 2 May 2013

• main way of achieving underwriting balance is through the renewal process

• primary responsibility is to deliver insurance ‘at cost’

• clubs’ underwriting policy is therefore to ensure that a minimum break-even position is achieved

• general increase is the figure by which premiums are increased before consideration is given to the member’s record

011

Claims inflation: affect on premium

GI principally designed to take into account the level of claims inflation

• only writing good risks • not chasing premium • risk management • early claim assessment • Group initiatives: major casualty outreach programme

12

Mitigation

The Standard Club Ltd is regulated by the Bermuda Monetary Authority. The Standard Club Ltd is the holding company of the Standard Club Europe Ltd and the Standard Club Asia Ltd. The Standard Club Europe Ltd is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Standard Club Asia Ltd is regulated by the Monetary Authority of Singapore.

13

Regulatory status

@StandardPandI The Standard P&I Club www.standard-club.com

@ctaylorplc Charles Taylor plc www.ctplc.com