Recipes for future success
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EMB Briefing March 2010
Recipes for future success UK motor insurers’ underwriting results have seen them increasingly plunging into the red. Unfortunately, the ability of prior year reserve releases to soften the blow is diminishing quickly. Peter Lee and Naeem Ali outline a potential recovery plan. Introduction
However, indications based on recent experience across a large number of companies are that the 2009 figure will exceed our gloomy forecast – reaching nearer 117–118%. Reserve releases may not be significant and some companies may have to dip into capital to pay their claims. Another driver for increased losses is the increases in frequency and severity of bodily injury claims. We estimate a 5–10% increase in frequency and a 5–8% increase in severity on an average claims basis over 2009 with a marked increase in the number of claims exceeding £5 million in value2. 2006 2007 2008been 2009 (est.)of the building Motor insurers have aware 2006 2007 2008 2009 (est.)
storm for some time. However, the increased selection power and willingness to shop around of consumers has stifled insurers’ ability to pass price rises through.
Loss experience: 2006-2009
120 115 110
%
EMB’s analysis of the 2008 Financial Services Authority (FSA) returns of UK motor insurers in its annual Motor Industry Report1 revealed a bleak picture. Across the private and commercial motor portfolios of the top 20 companies, combined operating ratios (COR) had reached over 105% despite a slight drop in underwriting loss ratios. More worryingly, the figures showed that the industry could no longer rely on reserve releases 2006-2009 to edge it into profit. Loss At theexperience: time, we estimated the Loss experience: 2006-2009 COR would reach 111% in 2009.
105 100 95 90 2006 2007 2008 2009 (est.) Operating ratio before prior year Operating ratio before prior year releases Operating ratio before prior year releases releases Operating ratio after prior year Operating ratio after prior year releases
Operating releases ratio after prior year Figure 1 – UK motor insurer performance ratios: 2006-2009 releases (estimated)
Recently released data from the new quarterly Confused.com/EMB Car Price Insurance Index3 shows the benign state of the private car market during 2007 and 2008 as prices dropped by 1.4% and increased by 1.8% respectively. While 2009 has seen more concerted action, with a 12.7% annual increase in the average cost of the cheapest quote for comprehensive cover, the quest for a return to profitability continues.
1 http://www.emb.com/uk/news/motor-insurer-results-even-worse. php 2 See our Briefing Paper: ‘Weathering the bodily injury claims surge’ for more details and recommendations for addressing bodily injury claims inflation. http://www.emb.com/EMBDOTCOM/UK/UK/ Resources/EMB%20Briefings_bodily%20injury_web.pdf
3 The Confused.com/EMB Car Insurance Price Index provides quarterly analysis of price movements in the UK private car comprehensive market using extensive data from quotes requested on Confused.com. http://www.emb.com/uk/news/confused.php
Operating ratio befor releases
Operating ratio after releases
Even with price increases on the scale seen in 2009, particularly in the second half of the year (6.3% alone in the fourth quarter according to our index), the signs are that the industry will continue to be in the red in 2010. Clearly this is not sustainable and the industry is reaching a crunch point. Those companies that want to stay the course have to make a conscious decision for profitability over growth, or face destroying their capital base.
strategies of the future are increasingly likely to rely on optimising the mix of profit and volume in order to achieve financial targets. The ability to analyse and simulate the effect of a range of market strategies is growing all the time as models become able to assimilate a wider range of pricing data and variables, and also marketing and customer relationship insights, that indicate the price elasticity of target groups or individuals.
3. Build superior rating capability for bodily injury As mentioned previously, insurers are footing ever larger bills for bodily injury claims. The increases are the result of changes in the claims environment where high–profile claims management companies have encouraged more people to come forward with a claim. At the same time, the increasing number of claimants per claim is affecting the severity of losses.
Figure 2 – Annualised price movements (Source: Confused.com/EMB Car Insurance Price Index)
So what will such a decision involve?
Pricing is the first step on the road to recovery Clearly, prices have to rise further, particularly as there is no sign of a reversal in underlying claims inflation. That much should almost be a given to insurance companies. We anticipate that the Confused.com/EMB Index will show at least a further two quarters of significant price increases in 2010. Yet the answer to personal lines insurers’ woes is unlikely be found in one single aspect of the business. If only it were that simple. However, we believe that those companies that see a future in writing motor business can put themselves on a firmer footing by paying attention to the following further points.
1. Focus on your pricing and underwriting approach, particularly for comparison sites Comparison sites have changed the way motor insurance is sold in the UK, and are increasing their penetration into household business. Insurers might not like it but they have to accept it and face up to it. One way they can do this is in their pricing approach by making as wide a use of all available data and relevant risk factors as is feasible to improve rating accuracy. Underwriting and acceptance criteria also need to be aligned with price uncertainty.
2. Renew the emphasis on pricing and volume control A volume–dominated strategy is a fast track to continuing losses in the current distribution environment. But, with the transparency offered to consumers by comparison sites, pricing cannot be divorced from the market reality. Profitable
Even given the likely stimulus of the recession on people’s willingness to claim in such circumstances, we believe that this is a trend that will be difficult to reverse in the short-term. The recommendations of the Jackson Report, particularly relating to the payment of referral fees and the use of After the Event insurance, offer some hope to insurers but, even if adopted, are unlikely to come into effect for at least two years. Therefore, insurers would be well advised to look in minute detail at their own bodily injury data (trawling all sources across the company) and use the latest pricing techniques to ensure that they are pricing their risk accordingly.
4. Defend renewal business more effectively and efficiently With client acquisition having become so competitive, retaining as many of your existing ‘good’ customers as possible is more important than ever. This will depend to a large extent on your ability to understand what drives particular customers and to tailor non-pricing actions to appeal to them.
5. Develop the strategy for ancillaries Even if you can achieve a greater yield within certain segments of the market, the margins are unlikely to be huge. Opportunities for additional profit will lie in developing more sophisticated methods for selling add-ons, such as breakdown cover and legal assistance. Pricing and marketing teams must work closely together to identify groups of customers and acquisition targets that will be attracted to buy these additional products.
6. Derive greater benefit from management information (MI) The more effectively you can ‘slice and dice’ your management information, the more you should be able to identify the strategies and activities that are paying off, and those that aren’t. Are there noticeable trends or blips in claims, by either peril or geography? Can you identify price
tipping points? What do your figures for sales by distribution channel tell you? What benchmarking data are you using to compare performance against competitors? As a minimum, these are the sorts of questions you should be posing about the efficacy of your MI.
around claims repudiation. This is a key weapon in arresting both leakage arising from undue payment of claims and for focusing extra attention on bodily injury claims that come through the claims and accident management company route.
7. Tackle fraud more aggressively
Ministry of Justice reforms coming into effect in April 2010 make the implementation of these changes all the more urgent. From this date, bodily injury claims of between £1,000 and £10,000 will follow a prescribed procedure aimed at accelerating payments to claimants. This could, in turn, create the possibility for additional claims leakage.
In 2008, the Association of British Insurers estimated that fraud cost the UK insurance industry £1.9 billion, the equivalent of £5.2 million every day. The industry has already done a lot but the effort has tended to be focused at the claims and investigation end of the cycle. Emerging technology and techniques enable prevention measures to be targeted more effectively at quotation, acceptance and administration functions within an insurance business. This reduces the number of frauds that reach the claims stage, a proportion of which will inevitably slip through the net. It also means that companies can take the pressure off their investigation teams, targeting their involvement more precisely and so saving money. Companies also need to review their procedures for combating employee fraud as more than a third of all fraud is perpetrated or aided by insiders.
8. Tighten supply chain management When margins are so tight, every part of your supply chain needs to be examined for the value it delivers. The basic question to ask is: “Could we do this ourselves effectively and add more to the bottom line?”
9. Micro-manage the claims environment Underlying claims inflation, from both bodily injury and fraud, will not be reversed in the short-term. Therefore, companies have to really tighten their claims procedures, particularly
Conclusion The increased power of consumers in buying private car insurance, combined with underlying claims inflation, have left many insurers with a serious problem. Whereas in the past they have been able to shield themselves from the worst of the financial impact by falling back on prior year reserve releases, this option is disappearing, and in some cases has already been exhausted. It is entirely possible that more companies will drop out of motor business. For the remainder, the status quo is unsustainable. Price action is a must. Beyond that, we have put forward a number of action points for insurers to consider in order to address the situation. Of course, the exact mix of the ingredients required to restore some modicum of profitability in these markets will vary from insurer to insurer. Companies have no time to waste in finding their own recipe for future success.
Peter Lee, Partner Peter specialises in pricing and has over twenty years’ experience in non-life insurance. Throughout his career he has been at the forefront of innovation, being one of the pioneers of the application of statistical modelling to personal lines pricing and then extending these techniques to commercial lines. More recently Peter has developed EMB’s price optimisation solution which has now been implemented in many of the largest general insurers in the world. Much of his work involves embedding technical analysis and demand-based pricing into a wider pricing process, allowing these enhanced capabilities to be more effectively leveraged. [email protected]
Naeem Ali, Consultant Naeem is a Fellow of the Institute of Actuaries and joined EMB in 2004. He is a specialist in the personal lines market, advising in areas such as pricing, reserving, mergers and acquisitions and financial risk management. He is also the lead author of EMB’s highly respected annual Motor Insurance Industry Report. [email protected]
EMB Worldwide
For more information contact your local EMB office or email us at [email protected]
Europe United Kingdom, Epsom Cambridge London +44 (0)1372 751060 [email protected]
North America San Diego, CA +1 858 793 1425 [email protected]
Germany, Cologne +49 221 356626-0 [email protected]
Chicago, IL +1 312 986 1425 [email protected]
France, Paris +33 (0)1 42 68 52 23 [email protected] Norway, Bergen +47 93 00 88 50 [email protected] The Netherlands, Amsterdam +31 (0)20 820 00 60 [email protected]
San Antonio, TX +1 210 826 2878 [email protected]
Chagrin Falls, OH +1 440 725 6204 [email protected] Hollywood, MD +1 312 261 9631 [email protected] Stamford, CT +1 203 604 2930 [email protected]
Africa South Africa, Johannesburg +27 11 728 7651 [email protected] Asia-Pacific Japan, Tokyo +81 3 5942 5901 [email protected] India, New Delhi +91 124 410 1018 [email protected] Australia, Sydney (The Quantium Group) +61 2 9292 6400 [email protected]
Latin America Brazil, Sao Paulo +55 11 2711 1500 [email protected]
Spain, Madrid + 34 91 791 29 34 [email protected]
emb.com The information and opinions contained in this publication are for general information purposes only. They do not constitute definitive professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. EMB does not accept or assume any liability, responsibility or duty of care for any loss which may arise from reliance on information or opinions published in this publication or for any decision based on it. EMB would be pleased to advise on how to apply the principles set out in this publication to your specific circumstances. Copyright © 2010. EMB Consultancy LLP. All rights reserved. EMB refers to the international actuarial, consulting and software practice carried on by EMB Consultancy LLP, EMB Software Management LLP, EMB Software Limited and their directly or indirectly affiliated firms or entities, partnerships or joint ventures, each of which is a separate and distinct legal entity.
15 15
10 10
05 05
00 00
95 95
90 90
EMB Briefing March 2010
Recipes for future success UK motor insurers’ underwriting results have seen them increasingly plunging into the red. Unfortunately, the ability of prior year reserve releases to soften the blow is diminishing quickly. Peter Lee and Naeem Ali outline a potential recovery plan. Introduction
However, indications based on recent experience across a large number of companies are that the 2009 figure will exceed our gloomy forecast – reaching nearer 117–118%. Reserve releases may not be significant and some companies may have to dip into capital to pay their claims. Another driver for increased losses is the increases in frequency and severity of bodily injury claims. We estimate a 5–10% increase in frequency and a 5–8% increase in severity on an average claims basis over 2009 with a marked increase in the number of claims exceeding £5 million in value2. 2006 2007 2008been 2009 (est.)of the building Motor insurers have aware 2006 2007 2008 2009 (est.)
storm for some time. However, the increased selection power and willingness to shop around of consumers has stifled insurers’ ability to pass price rises through.
Loss experience: 2006-2009
120 115 110
%
EMB’s analysis of the 2008 Financial Services Authority (FSA) returns of UK motor insurers in its annual Motor Industry Report1 revealed a bleak picture. Across the private and commercial motor portfolios of the top 20 companies, combined operating ratios (COR) had reached over 105% despite a slight drop in underwriting loss ratios. More worryingly, the figures showed that the industry could no longer rely on reserve releases 2006-2009 to edge it into profit. Loss At theexperience: time, we estimated the Loss experience: 2006-2009 COR would reach 111% in 2009.
105 100 95 90 2006 2007 2008 2009 (est.) Operating ratio before prior year Operating ratio before prior year releases Operating ratio before prior year releases releases Operating ratio after prior year Operating ratio after prior year releases
Operating releases ratio after prior year Figure 1 – UK motor insurer performance ratios: 2006-2009 releases (estimated)
Recently released data from the new quarterly Confused.com/EMB Car Price Insurance Index3 shows the benign state of the private car market during 2007 and 2008 as prices dropped by 1.4% and increased by 1.8% respectively. While 2009 has seen more concerted action, with a 12.7% annual increase in the average cost of the cheapest quote for comprehensive cover, the quest for a return to profitability continues.
1 http://www.emb.com/uk/news/motor-insurer-results-even-worse. php 2 See our Briefing Paper: ‘Weathering the bodily injury claims surge’ for more details and recommendations for addressing bodily injury claims inflation. http://www.emb.com/EMBDOTCOM/UK/UK/ Resources/EMB%20Briefings_bodily%20injury_web.pdf
3 The Confused.com/EMB Car Insurance Price Index provides quarterly analysis of price movements in the UK private car comprehensive market using extensive data from quotes requested on Confused.com. http://www.emb.com/uk/news/confused.php
Operating ratio befor releases
Operating ratio after releases
Even with price increases on the scale seen in 2009, particularly in the second half of the year (6.3% alone in the fourth quarter according to our index), the signs are that the industry will continue to be in the red in 2010. Clearly this is not sustainable and the industry is reaching a crunch point. Those companies that want to stay the course have to make a conscious decision for profitability over growth, or face destroying their capital base.
strategies of the future are increasingly likely to rely on optimising the mix of profit and volume in order to achieve financial targets. The ability to analyse and simulate the effect of a range of market strategies is growing all the time as models become able to assimilate a wider range of pricing data and variables, and also marketing and customer relationship insights, that indicate the price elasticity of target groups or individuals.
3. Build superior rating capability for bodily injury As mentioned previously, insurers are footing ever larger bills for bodily injury claims. The increases are the result of changes in the claims environment where high–profile claims management companies have encouraged more people to come forward with a claim. At the same time, the increasing number of claimants per claim is affecting the severity of losses.
Figure 2 – Annualised price movements (Source: Confused.com/EMB Car Insurance Price Index)
So what will such a decision involve?
Pricing is the first step on the road to recovery Clearly, prices have to rise further, particularly as there is no sign of a reversal in underlying claims inflation. That much should almost be a given to insurance companies. We anticipate that the Confused.com/EMB Index will show at least a further two quarters of significant price increases in 2010. Yet the answer to personal lines insurers’ woes is unlikely be found in one single aspect of the business. If only it were that simple. However, we believe that those companies that see a future in writing motor business can put themselves on a firmer footing by paying attention to the following further points.
1. Focus on your pricing and underwriting approach, particularly for comparison sites Comparison sites have changed the way motor insurance is sold in the UK, and are increasing their penetration into household business. Insurers might not like it but they have to accept it and face up to it. One way they can do this is in their pricing approach by making as wide a use of all available data and relevant risk factors as is feasible to improve rating accuracy. Underwriting and acceptance criteria also need to be aligned with price uncertainty.
2. Renew the emphasis on pricing and volume control A volume–dominated strategy is a fast track to continuing losses in the current distribution environment. But, with the transparency offered to consumers by comparison sites, pricing cannot be divorced from the market reality. Profitable
Even given the likely stimulus of the recession on people’s willingness to claim in such circumstances, we believe that this is a trend that will be difficult to reverse in the short-term. The recommendations of the Jackson Report, particularly relating to the payment of referral fees and the use of After the Event insurance, offer some hope to insurers but, even if adopted, are unlikely to come into effect for at least two years. Therefore, insurers would be well advised to look in minute detail at their own bodily injury data (trawling all sources across the company) and use the latest pricing techniques to ensure that they are pricing their risk accordingly.
4. Defend renewal business more effectively and efficiently With client acquisition having become so competitive, retaining as many of your existing ‘good’ customers as possible is more important than ever. This will depend to a large extent on your ability to understand what drives particular customers and to tailor non-pricing actions to appeal to them.
5. Develop the strategy for ancillaries Even if you can achieve a greater yield within certain segments of the market, the margins are unlikely to be huge. Opportunities for additional profit will lie in developing more sophisticated methods for selling add-ons, such as breakdown cover and legal assistance. Pricing and marketing teams must work closely together to identify groups of customers and acquisition targets that will be attracted to buy these additional products.
6. Derive greater benefit from management information (MI) The more effectively you can ‘slice and dice’ your management information, the more you should be able to identify the strategies and activities that are paying off, and those that aren’t. Are there noticeable trends or blips in claims, by either peril or geography? Can you identify price
tipping points? What do your figures for sales by distribution channel tell you? What benchmarking data are you using to compare performance against competitors? As a minimum, these are the sorts of questions you should be posing about the efficacy of your MI.
around claims repudiation. This is a key weapon in arresting both leakage arising from undue payment of claims and for focusing extra attention on bodily injury claims that come through the claims and accident management company route.
7. Tackle fraud more aggressively
Ministry of Justice reforms coming into effect in April 2010 make the implementation of these changes all the more urgent. From this date, bodily injury claims of between £1,000 and £10,000 will follow a prescribed procedure aimed at accelerating payments to claimants. This could, in turn, create the possibility for additional claims leakage.
In 2008, the Association of British Insurers estimated that fraud cost the UK insurance industry £1.9 billion, the equivalent of £5.2 million every day. The industry has already done a lot but the effort has tended to be focused at the claims and investigation end of the cycle. Emerging technology and techniques enable prevention measures to be targeted more effectively at quotation, acceptance and administration functions within an insurance business. This reduces the number of frauds that reach the claims stage, a proportion of which will inevitably slip through the net. It also means that companies can take the pressure off their investigation teams, targeting their involvement more precisely and so saving money. Companies also need to review their procedures for combating employee fraud as more than a third of all fraud is perpetrated or aided by insiders.
8. Tighten supply chain management When margins are so tight, every part of your supply chain needs to be examined for the value it delivers. The basic question to ask is: “Could we do this ourselves effectively and add more to the bottom line?”
9. Micro-manage the claims environment Underlying claims inflation, from both bodily injury and fraud, will not be reversed in the short-term. Therefore, companies have to really tighten their claims procedures, particularly
Conclusion The increased power of consumers in buying private car insurance, combined with underlying claims inflation, have left many insurers with a serious problem. Whereas in the past they have been able to shield themselves from the worst of the financial impact by falling back on prior year reserve releases, this option is disappearing, and in some cases has already been exhausted. It is entirely possible that more companies will drop out of motor business. For the remainder, the status quo is unsustainable. Price action is a must. Beyond that, we have put forward a number of action points for insurers to consider in order to address the situation. Of course, the exact mix of the ingredients required to restore some modicum of profitability in these markets will vary from insurer to insurer. Companies have no time to waste in finding their own recipe for future success.
Peter Lee, Partner Peter specialises in pricing and has over twenty years’ experience in non-life insurance. Throughout his career he has been at the forefront of innovation, being one of the pioneers of the application of statistical modelling to personal lines pricing and then extending these techniques to commercial lines. More recently Peter has developed EMB’s price optimisation solution which has now been implemented in many of the largest general insurers in the world. Much of his work involves embedding technical analysis and demand-based pricing into a wider pricing process, allowing these enhanced capabilities to be more effectively leveraged. [email protected]
Naeem Ali, Consultant Naeem is a Fellow of the Institute of Actuaries and joined EMB in 2004. He is a specialist in the personal lines market, advising in areas such as pricing, reserving, mergers and acquisitions and financial risk management. He is also the lead author of EMB’s highly respected annual Motor Insurance Industry Report. [email protected]
EMB Worldwide
For more information contact your local EMB office or email us at [email protected]
Europe United Kingdom, Epsom Cambridge London +44 (0)1372 751060 [email protected]
North America San Diego, CA +1 858 793 1425 [email protected]
Germany, Cologne +49 221 356626-0 [email protected]
Chicago, IL +1 312 986 1425 [email protected]
France, Paris +33 (0)1 42 68 52 23 [email protected] Norway, Bergen +47 93 00 88 50 [email protected] The Netherlands, Amsterdam +31 (0)20 820 00 60 [email protected]
San Antonio, TX +1 210 826 2878 [email protected]
Chagrin Falls, OH +1 440 725 6204 [email protected] Hollywood, MD +1 312 261 9631 [email protected] Stamford, CT +1 203 604 2930 [email protected]
Africa South Africa, Johannesburg +27 11 728 7651 [email protected] Asia-Pacific Japan, Tokyo +81 3 5942 5901 [email protected] India, New Delhi +91 124 410 1018 [email protected] Australia, Sydney (The Quantium Group) +61 2 9292 6400 [email protected]
Latin America Brazil, Sao Paulo +55 11 2711 1500 [email protected]
Spain, Madrid + 34 91 791 29 34 [email protected]
emb.com The information and opinions contained in this publication are for general information purposes only. They do not constitute definitive professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. EMB does not accept or assume any liability, responsibility or duty of care for any loss which may arise from reliance on information or opinions published in this publication or for any decision based on it. EMB would be pleased to advise on how to apply the principles set out in this publication to your specific circumstances. Copyright © 2010. EMB Consultancy LLP. All rights reserved. EMB refers to the international actuarial, consulting and software practice carried on by EMB Consultancy LLP, EMB Software Management LLP, EMB Software Limited and their directly or indirectly affiliated firms or entities, partnerships or joint ventures, each of which is a separate and distinct legal entity.
