1. Current Issues in General Insurance
Presentation to the Faculty of Actuaries Students Society
12 April 2010
Tim Jenkins

2. Agenda Overview of paper Industry update Personal injury update
UK Asbestos update
Solvency II
New tax rules
Recessionary issues
Market cycles
Current Issues in General Insurance 2

3. Industry update Hot topics affecting the largest UK general insurers
2009
UK trading conditions for general insurers were
“challenging”, “rocky”, “difficult”, “tough”
UK Motor
Hardening market
Additional claims cost
Recession
Commercial lines business volumes affected by lower economic activity
Weather
Cumbria floods and snow at end of 2009
Lessons learnt
Periodic Payments
Increase in personal injury claims settled by periodic payments
Asbestos
Some insurance groups reported material strengthening of their asbestos reserves
Current Issues in General Insurance

4. Personal injury update
Personal injury claims
Largest part of the reserves for certain classes such as
motor, employers liability, medical malpractice
A number of potential reforms announced in 2009 and 2010
Lord Justice Jackson’s review of civil costs
Fundamental review into the costs of civil litigation
Purpose of Review
Understand how the present cost regime operates
Seek views of interested parties
Compare the cost regime with other jurisdictions
Prepare a report setting out recommendations for reform
Recommendations
Success fees and ATE insurance premiums should cease to be recoverable
Increase in general damages
Referral fees
Qualified one way cost shifting
Fixed costs in fast track litigation
Potential Impact
Majority of claimants end up with more compensation
Costs payable to claimant solicitors by liability insurers would reduce
Costs more proportionate as defendants no longer pay success fees and ATE insurance premiums
Current Issues in General Insurance

5. UK Asbestos update Summary Mesothelioma Industry impact
AWP has doubled its estimate of future costs for UK asbestos claims to UK insurance industry
2009 estimate of £11bn compared to estimate from previous AWP review in 2004
Non-insurance costs are not covered by AWP
Mesothelioma
Near doubling of proportion of mesothelioma sufferers claiming for compensation
Approximately 90% of AWP’s revised estimate relates to mesothelioma
Number of claims nearly double number of deaths by 2008
Possible reasons for the increase include:
Increased publicity of asbestos-related diseases
NHS Mesothelioma Framework
Internet
Uncertainty in projecting future relationship between deaths and claims
Estimates range from £5bn to £20bn
Industry impact
Most of insurance industry should have allowed for higher experience over last few years
Pleural plaques
Excluded from latest AWP study due to current state of legal uncertainty across UK
Current Issues in General Insurance

6. UK Asbestos update Mesothelioma Insurance Claims Experience 1968-2008
Source: Faculty & Institute of Actuaries 2009 UK Asbestos Working Party: “UK Asbestos Working Party Update 2009”
Current Issues in General Insurance

7. Solvency II Pillar 1 Pillar 2 Pillar 3
Comes into effect 1 November 2012: more urgent than that sounds
Old capital formula very simple and too low
Pillar 1
Assessment of regulatory capital
Standard formula or internal model
Approval needed to use internal model
Large increase in regulatory minimum
Bespoke standard- formula factors possible
Reserving rules change under Solvency II
Best estimate
Discounted
Risk margin
Pillar 2
Regulatory supervision
Pillar 3
Disclosure
Current Issues in General Insurance

8. New tax rules for GI reserves Background & Summary
During 2009, new regulations in respect of the tax deductibility of general insurance technical provisions were brought into force
Seek to prevent insurers reserving too prudently for tax purposes
New legislation applies to UK insurers, UK branches and captive insurers
HMRC does not want to target the vast majority of general insurers – but the legislation has affected all
Insurers tax return may be challenged if HMRC considers the technical provisions stated in the accounts exceed an “appropriate amount”
If “disallowed” the closing technical provisions in one year are the brought forward provisions for the next year, for tax purposes
Technical provisions in the accounts should be allowable, provided the claims reserve component of the provisions are based on an actuarial opinion that they are not excessive
How ‘excessive’ is interpreted is at the heart of actuarial considerations involved in providing the actuarial opinion
Current Issues in General Insurance

9. New tax rules for GI reserves Three conditions for the “appropriate amount” to be the technical provisions in the accounts
General insurer gives written confirmation with tax return that claims provision is not excessive, and
That confirmation is founded on or supported by the written opinion of an actuary or other suitably skilled person that the amount stated in the accounts is not excessive
The actuarial opinion must reflect the circumstances at the time the provisions are adopted by the general insurer (i.e. when the accounts are approved by the directors)
The actuarial opinion must be based on standards set by the Board for Actuarial Standards (or equivalent if a non-UK entity)
If one or more of the conditions are not met, the “appropriate amount” for the claims provision is the undiscounted best estimate (with the possible need to demonstrate that this is a “reasonable” best estimate)
Current Issues in General Insurance

10. Recessionary issues Key classes affected by recession are
Personal lines
Motor
Household
Other
Commercial lines
Trade credit risks
Political risks
Property
Recessionary effects on claims and pricing
Higher unemployment
Buying behaviour
Uninsured levels increase
Reduced car mileage.
Commercial property unoccupied
Increase in fraudulent claims
Claims inflation
Impact on claims reserving
ACPC
Chain Ladder BF
Other impacts of the recession on insurance
Pricing
Mergers and Acquisitions
Discounting of reserves
Current Issues in General Insurance

11. Market cycles The Underwriting Cycle
Current Issues in General Insurance

12. Market cycles The Reserving Cycle
Gross ULRs of Casualty business at Lloyd’s of London
Source: Lloyd’s SRD Database.
The above chart has been used with the kind permission of Lloyd’s of London
Current Issues in General Insurance

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Current Issues in General Insurance 13