© 2010 Deloitte LLP. Private and confidential 12 April 2010 Tim Jenkins Current Issues in General...

© 2010 Deloitte LLP. Private and confidential© 2010 Deloitte LLP. Private and confidential

12 April 2010

Tim Jenkins

Current Issues in General InsurancePresentation to the Faculty of Actuaries Students Society

© 2010 Deloitte LLP. Private and confidential

Agenda

Overview of paper

Personal injury update

Industry update

UK Asbestos update

Solvency II

New tax rules

2 Current Issues in General Insurance

Recessionary issues

Market cycles


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


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


UK Asbestos update


Summary• 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


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”


Solvency II

Pillar 3

Disclosure


Pillar 2

Regulatory supervision

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

Comes into effect 1 November 2012: more urgent than that sounds

Old capital formula very simple and too low


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


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)


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

Other impacts of the recession on insurance

• Pricing• Mergers and Acquisitions• Discounting of reserves

Impact on claims reserving

• ACPC• Chain Ladder• BF


Market cycles

The Underwriting Cycle



Market cycles

The Reserving Cycle


Source: Lloyd’s SRD Database.The above chart has been used with the kind permission of Lloyd’s of London

Gross ULRs of Casualty business at Lloyd’s of London

© 2010 Deloitte LLP. Private and confidential© 2010 Deloitte LLP. Private and confidential

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© 2010 Deloitte LLP. Private and confidential 12 April 2010 Tim Jenkins Current Issues in General...

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