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How the non-life insurance landscape has changed Back  
2001 will prove to be a watershed period for the insurance industry - both on a global and local basis. A combination of factors has conspired to bring the phrase ‘getting back to basics’ to the forefront of many discussions. It has, by any standards, been a dramatic year, says Paul Donaldson.
Reflecting on major global developments, the sector continued to be severely impacted by reducing investment returns thereby placing even more emphasis on underwriting results and expense control. In this context the primary focus for non-life companies remained on reducing their combined operating ratio (ie: net claims incurred, expenses and commissions divided by net premium income). The ‘COR’ is the key measurement tool used within the industry. It’s worth noting that, in 2000, the Irish market COR came in at 118.5 percent. This matched up against a 113 percent return in the UK and a 110 percent market return in the US The 2001 result is not expected to show any material improvement. It is widely accepted that a maximum COR result of 103 percent is required to allow companies deliver an acceptable return to shareholders.

Keeping these figures in mind, the general insurance backdrop has clearly not been a bed of roses. Following a sustained period of stable or reducing insurance premiums, fuelled by severe competition and the previously acceptable investment returns experienced in 1990’s, the chickens were now coming home to roost - the insurance cycle had turned. Unfortunately, clear evidence of this was seen in the collapse of the Independent Insurance Group during the year - a wake-up call to investors, insurance companies and, most importantly, customers.

Largest event in insurance history
Against this landscape the financial losses resulting from 11 September events have been enormous, with many different industry sectors being affected, including, of course, the insurance industry. The primary effects are being felt by all and include:-
• Reduced supply of capacity to write business in the general market
• a more selective approach to risk assessment and underwriting
• significantly higher re-insurance charges for insurers
• a flight by business providers and customers to quality insurers and re-insurers who have the capacity and financial muscle to withstand such events

For customers, all of this points to higher premium charges. This has manifested itself over the last few months of the year through a greater emphasis by insurers on risk selectivity and more accurate pricing based on a true assessment of their potential losses. As outlined earlier, trends toward higher premium rates, both for personal and commercial insurance, were evident in most major markets around the world before 11 September. These trends have now been significantly reinforced. Customers world-wide have been reminded of the importance of adequate insurance both for their business and personal needs, thus increasing demand for insurance products and services.

Local issues
Zooming in on more local issues, one has to highlight the increasing impact of claims inflation across all insurance classes in the Irish market. Fuelled by economic growth, insurers claims settlement costs have accelerated on a double digit, year on year basis - way ahead of general inflationary increases. To recognise the scale of this issue, one only has to reflect on such areas as the cost of building labour and materials or motor vehicle replacement parts, right through to business interruption claims. Such increases have not, to date, been adequately reflected in commercial or personal insurance premium charges. While the recent slowing in the economy may reduce some claims inflationary pressures, claims inflation will remain an issue.

Looking briefly at two specific areas, namely home and motor insurance, it is noted that, at the time of writing we have been spared the impact of serious storms or nation-wide floods in 2001. Like any industry, we must plan and budget for such incidents. However, over the past four years, the frequency and cost of serious weather related events has necessitated a complete rethink of claims forecast modelling for home insurance. In the light of continuing climatic change, insurers cannot continue to pay for what are increasingly foreseen events.

The cost of motor insurance continued to be vigorously debated during the year. This sector accounts for some 50 percent of all insurance premiums in the Irish market. Compared to many other markets, the cost of motor insurance premiums in Ireland is expensive. The reason is abundantly clear - premium charges are directly linked to the frequency and cost of claims. Insurers will continue to develop positive initiatives to try and enhance the cost position for segments of this market but, until there is a fundamental mindset change in driving attitudes, specifically with respect to speed, drink or careless driving related incidents, the basic climate will not change. It will take aggressive and continuous government led road safety initiatives, supported by rigorous enforcement of the law to create this sea change.

It would be wrong to review the past year without commenting on the legal fees attaching to claims settlements. Such charges now account for some 40 percent of claims costs in the market and feed directly into the cost of insurance premiums. This is simply not acceptable. We must maintain a fair and equitable approach to delivering compensation. But we can streamline the legal process involved in settling claims, particularly those related to personal injury compensation, and control one of the major costs in our business. Government led initiatives such as the establishment of the Personal Injuries Assessment Board must be driven forward with the support of insurers, the legal profession and other interested parties.

Looking forward
Despite the negativity surrounding the general insurance market in recent, we can look forward with more confidence. Aided by a growing understanding among customers of the true value of their insurance policy and with an emphasis on driving costs out of the industry, growth opportunities will emerge. Encouraging as that may be, the investment community will remain focused on how organisations plan to take advantage of these opportunities. The winners will be the global organisations which can differentiate themselves from the pack through underwriting and claims excellence and through class leading customer service and innovation. For some companies this may require a concentration on selected business segments only, as the days of trying to be a good ‘jack of all trades’ are over. In the Irish market six companies underwrite some 80 percent of all non-life premium income. With the exception of a couple of specialist niche players, it is difficult to see others willing to make the long term investment of capital required gain a sufficient foothold and financial return in the Irish market.

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