At a time when regulators are pondering the ‘too big to fail’ question, Standard & Poors has issued a timely reminder of the reasons so many insurers have hit the wall during recent decades.

Poor liquidity, under-pricing, under-reserving, and management and governance issues are among the main recurring issues that have caused, and still are causing, the failure of rated and unrated insurers, according to the report published by S&P.

With the catchy title, “What may cause insurance companies to fail; and how this influences our criteria,” the report explains how S&P’s observations, from the 1980s onward, of how and why insurers may fail, have informed its ratings criteria for insurance companies.

For example it makes reference to the high profile failure of Independent Insurance, which resulted in custodial sentences for three of its directors, explaining: “The 2001 failure of Independent Insurance in the U.K. also reflected problems associated with rapid growth and inadequate governance, and ultimately fraud. Growth was achieved through underpricing, followed by under-reserving overseen by a dominant chief executive. The uncertainty surrounding the adequacy of reserves was exacerbated by claims that were suppressed from the company’s systems, which in turn affected actuarial projections of claims development. Reinsurance irregularities were another problem. The company also had a history of price undercutting and reserving issues.”

“When we refer to insurer failures, we mean company defaults, liquidations, or regulatory takeovers, or “near miss” situations where such events would have occurred if the company had not received external support,” said Standard & Poor’s criteria officer Michelle Brennan.

“Since the 1980s, we’ve seen waves of failures that have informed our criteria developments. From the cases of distress or failure that we’ve observed over this period, one or more of a set of common key factors was present, and often these factors reinforced each other.”

These key factors are:

• Poor liquidity management;
• Under-pricing and under-reserving;
• A high tolerance for investment risk;
• Management and governance issues;
• Difficulties related to rapid growth and/or expansion into non-core activities; and
• Sovereign-related risks.

Liquidity issues, spurred by problem assets and heightened by weak liability structures in times of stress, have historically been a main cause of insurer failure, said S&P. However, it added that even with improvements in how companies manage liquidity and reserving, management and governance issues continue to prompt insurance distress, and under-pricing and managing rapid growth remain key risks.

“Our observations of insurer failures have informed our criteria over the past two decades including our new insurance criteria published on May 7, 2013. For example, support – whether from another part of a group or from a government body – has, in our opinion, prevented the failure of several distressed insurance companies over the past decade. Assessing the likelihood of receiving such support is therefore a crucial feature of our rating methodology.”

More idiosyncratic causes of failure, such as specific issues with management and governance, are the focus of S&P’s criteria for assessing the effectiveness of management and risk management structures. In compiling its revised Group Rating Methodology, it considered cases where subsidiaries collapsed or where it thinks they would have done so in the absence of group support.

By contrast, past insurer failures and distress also indicate how insurers can attain stronger creditworthiness. The insurers that performed best in times of systemic stress share notable common attributes; robust franchises, solid liquidity management, and good capitalization are all characteristics of the most resilient insurers, said S&P. “These companies also display strong underwriting and reserving policies, competitive cost structures and investment returns, and prudent risk management structures and risk appetite.”

The Reed Insurance 2013 Salary and Market Insight canvassed the attitudes of 1,500 employers and employees, also suggested that job security is strong with three quarters (77%) of the insurance sector feeling secure in their employment, sparking confidence to look for the next role.

Jobs boost for insurance: Reed report says movement will increase

There were some areas of concern, including responses to questions about stability within the workforce. One third of insurance workers (33%) said the workforce at their organisation was ‘unstable’, against an average of 16% across the jobs market as a whole.

Nevertheless, Ian Bull, Divisional Manager, at Reed Insurance, commented: “The jobs market is a good indication of the mood of business and the increase we have seen in insurance job opportunities over the past year indicates confidence in the sector. Insurance employers are feeling confident to invest in talent and it is encouraging that this has now translated into confidence for workers to look for new roles too.”

The report also highlighted that half (50%) of insurance employers are worried about staff moving on to seek better opportunities, despite 57% of employees saying they are satisfied in their current role. In response to this, employers have increased the financial rewards given to employees, with bonuses up 39% and pay rises up 30%.

Ian Bull continued: “While it is clear some insurance sector employers are concerned about losing talent, it is important to remember that a buoyant jobs market presents opportunity.  Employers wanting to hold on to talent should ensure they are investing in staff – through training and promotion opportunities – and those that are looking to recruit can be confident that the available talent pool has widened.”

By Ralph Savage

The Financial Ombudsman Service has provided insurers with clear evidence of the urgent need to update their question sets at point of sale.

The body which handles consumer and small business complaints reported a 60% rise in the number of disputes over ‘non disclosure’ in its annual review for the financial year 2012-2013.

The news was particularly pertinent this year after the FOS pointed out that new legislation in the form of the Consumer Insurances (disclosure and representations) Act, is already in place governing this practice and that distributors of insurance should be taking more careful notice.

In its annual review, the FOS said:

“The number of complaints involving motor insurance continued to rise during the year – by 7% – following a 26% increase in the previous year. The proportion of motor insurance complaints we upheld in favour of the consumer – at 47% – also remained higher than in other areas.

These trends continue to reflect the tougher economic times. But as we noted in last year’sannual review, they also reflect the increased number of entrenched disputes where neither side is prepared to reconsider their position or agree to informal mediation.

Disappointingly, disputes over “non-disclosure” by the consumer rose by some 60% during the year. Many of these “non-disclosure” complaints could have been avoided if the insurer had asked the consumer clearer questions when they first applied for the policy. For example, we also continued to see problems where insurers asked only general questions about convictions, when they actually wanted to know specifically about any fixed penalty points.

Our approach to complaints involving “non-disclosure” and misrepresentation has developed over many years – and is reflected in law in the new Consumer Insurance (Disclosure and Representation) Act 2012, which came into force on 6 April 2013.

A number of “non-disclosure” complaints involved consumers who had used comparison websites that had confused them. This happened, for example, where the comparison sites had made certain assumptions about the consumer and had automatically filled in some of the information.

We have talked about this with the Association of British Insurers (ABI) – as part of out work to feed our experience back to the insurance sector – and suggested where insurers might want to remove some of the ambiguity that can arise when consumers use these websites.

During the year we continued to see cases where an insurer suspected that a claim was fraudulent – and made assumptions without asking the consumer for an explanation of what had happened. If the insurer had asked more questions in the first place – to help it decide whether any “non-disclosure” was innocent, inadvertent or deliberate – the dispute may never have arisen.

There are often similar issues in disputes involving claims for stolen vehicles. To be able to establish that fraud has taken place there must be a very high degree of probability. This means more than just suspicion. In these cases, we check that a proper investigation has been carried out. This includes the insurer having the vehicle thoroughly examined and giving the consumer the opportunity to explain any apparent inconsistencies.”

Stephen Netherway, Head of the Insurance and Reinsurance Group at CMS Cameron McKenna, says the situation could not have been made any clearer. “The Act itself is very much based on the FOS model and its naked intention is to increase the number of claims being paid out to consumers. On a practical level however, it is certainly the right time for brokers and insurers to update amongst other things point of sale documentation, websites and telephone transcripts; clarify processes for placements, mid-term adjustments and renewals.”

The U.S. Chamber Institute for Legal Reform (ILR) says 57 percent of British consumers oppose UK Government proposals to adopt US-style legal reforms.

Justice for all? US legal lobbyists say 57% of folks are against collective actions

The UK Government announced in last week’s Queen’s Speech the introduction of the draft Consumer Rights Bill, a key piece of legislation that is likely to fundamentally change the face of UK litigation. The ILR survey, fielded by Ipsos MORI, is according to the ILR, “a timely indication of deep public scepticism to the Bill”, which will enable opt-out collective actions where breaches of consumer or competition law are said to have taken place.

“The introduction of opt-out class actions in the UK could open the floodgates to US-style collective action law suits, and the possibility of a burgeoning market in spurious litigation in Britain, driven by a fast-expanding legal sector allied to a litigation funding industry that is reaching maturity,” said Lisa A. Rickard, president of the ILR.

The ILR also suggests that a majority of UK consumers do not believe third party funding of litigation is acceptable.  In a statement today the ILR added: “The survey highlighted other consumer concerns about the US litigation system, including the fact that lawyers typically claim half of any damages, that US courts are crowded with frivolous lawsuits, and lawsuits cost small businesses billions of dollars that would otherwise be put toward growth and job creation. UK consumers share US concerns that it is the lawyers that benefit most from this class action system.

Nera Study of Comparative Economic Cost of Litigation

• Cost of litigation to the UK economy is twice the Eurozone average
• Litigation costs the US economy 150 percent more than the Eurozone average

The ILR also published a study by NERA Economic Consulting showing that the U.S. has the world’s costliest legal system as a percentage of its economy, at more than 150% higher than the Eurozone average. The UK economy shoulders the third-highest costs, around twice the Eurozone average.

“As the U.S. experience has shown, excessive litigation creates enormous costs for businesses, workers, consumers and the overall economy,” said ILR’s Rickard. “The UK economy already shoulders a high cost compared to Eurozone neighbours, and so policy-makers should be wary of embracing aspects of an expensive system that undermines UK competitiveness, impedes economic growth and limits job creation.”

The ILR also released a national opinion survey of US citizens that shows an overwhelmingly negative view the US civil legal system, with respondents taking the view that it is more abuse-prone than a decade ago. A key concern expressed is that the US justice system primarily benefits lawyers, rather than consumers.

According to the Penn Schoen Berland, and Public Opinion Strategies poll, 87 percent of voters view the number of lawsuits in the country as a problem, with 69 percent also saying that there has been increased abuse of the legal system over the past decade.  Furthermore, the poll revealed that one-in-three voters – and 43 percent of small business owners – have either been threatened with or involved in a civil lawsuit.

Meanwhile, only 14 percent of those who were part of a class action lawsuit report having received something meaningful – such as a cashed check or redeemed coupon – as a result of the lawsuit. In contrast, four in five voters that had been involved in a civil lawsuit said that lawyers benefit the most from class action lawsuits.

The report from law firm Mayer Brown, claims the process could transform the insurance market, with insurers needing to develop a deep understanding of their client’s businesses in order to consider the regulatory environment and its impact on the risks they are underwriting.

Risk concerns? Lawyers are warning of complex potential liabilities from 3d printing

Professional indemnity is another area likely to be affected by 3D printing. According to the report, if a product designer produces a digital file of their design for use in a 3D printer that then goes on to cause damage to property or personal injury because the design was defective the exposure to insurers could be huge. The prevalence of 3D printing and the potential for files to be downloaded a significant number of times also adds to the risks for insurers.

Ingrid Hobbs, Insurance partner at Mayer Brown, said: “Discussions between risk managers on the insurance side and business product developers within the client base they’re looking to insure are so important.”

“Such discussions will allow insurers to ask structured, targeted questions at placement or renewal stage about what a company is doing in relation, not only to developing exciting products through 3D printing but also in relation to protecting itself from possible liabilities and claims arising from the use of 3D.”

Recent medical reports have confirmed the growing body of evidence that taking a daily low-dose of aspirin reduces cancer mortality, in addition to its known benefits for cardiovascular health. Experts believe around 15% of current cancer deaths could be prevented by daily aspirin use with benefits beginning as early as three years into treatment. Conventional cancer treatments are expensive and new treatments typically require a lengthy approval process. By contrast, aspirin is inexpensive and readily available and has the potential for rapid uptake.

Based on these new findings, RMS modeled several potential scenarios of daily aspirin uptake which revealed that a typical 65 year-old male could see a 12-month increase in life expectancy and a 40% increase in the chance of living to 100, depending on a variety of lifestyle factors.*

Analyzing the impact of this life expectancy increase on the average pension scheme, RMS’ modeling shows that liabilities for U.K. males could rise by 0.7% within 20 years. This increase is equivalent to the rise that would occur from the complete eradication of smoking within a generation, and the impact is roughly equal to the average annual life expectancy increase from all drivers of mortality improvement over the past 50 years. Current liabilities for the public and private pensions industries across North America and Europe depend significantly on estimation techniques, but the effect across the more than $13 trillion liabilities could amount to more than $100 billion.

“There are many factors that currently drive high rates of mortality improvement,” said Dr. Andrew Coburn, senior vice president of RMS LifeRisks. “But a rapid increase in pensioners taking daily aspirin could trigger one of the most significant new expectancy changes that we have seen in years.”

The benefit of aspirin for an individual depends on a variety of factors such as smoking, family history, and the potential for negative side effects. The level of impact will also vary across different countries, with various degrees of cancer prevalence and different proportions of people already taking daily aspirin for heart risks.  However, this rise in life expectancy is likely to be a phenomenon across all the various Western pension markets and perhaps beyond. The increase in aspirin uptake could have an even more profound impact on deferred annuity portfolios, because younger people are more likely to benefit from aspirin treatment.

RMS has released a detailed whitepaper on ‘The Impact of Daily Aspirin Intake on Pension Liabilities’ which is available at http://www.rms.com/LifeRisks.

* RMS modeled four potential aspirin uptake scenarios with two key assumptions: population penetration – the proportion of the population not already taking aspirin that would be willing and medically able to comply with a regimen of daily aspirin – and adoption rate. The figures quoted in the press release are based on 75% of U.K. males taking daily aspirin and 20 years until this uptake is widely adopted.

With the ink barely dry on the latest round of annual results from the leading insurers the usual bleating began from CEO’s about the parlous state of UK commercial insurance.

To be honest, the current ‘soft market’ has been going on for so long now that they are probably in danger of running short of negatives to describe it. “Challenging”, “difficult” and “unacceptable” are just a few that spring to mind. Unsurprisingly though, “predictable” and “expected” were not included.

Yet surely they seem far more appropriate as the current poor performance would have come as no surprise at all.  And don’t insurers only have themselves to blame?

After all, many have been losing their shirts for some years now, with combined ratios for commercial consistently above 100%. But come results season, the great and the good merely seem to whinge collectively, rattle on about the need for “underwriting discipline” and then just carry on haemorrhaging cash.

Yet look at any survey of brokers’ attitudes over the past few years and it becomes pretty clear what has been going on and how it has contributed to the general disarray that is UK commercial insurance today.

Fierce competition fuelled by overcapacity and a desire for growth among some players has lead to cut-throat rates and dual-pricing; tactics that continue to drive brokers and their clients to complete distraction.

Of course, we occasionally read about price increases too. But these tend to be restricted to renewal business pricing as many insurers still have far less control over local rating for new cases. Hence existing loyal clients get asked to pay more, holding brokers have to go to market, insurers then undercut sensible renewal terms; and the whole sorry merry-go-round turns again.

And after all this effort, no-one benefits. Insurers generate inadequate risk premiums and also bear the cost of either losing hard won business or acquiring expensive new cases. Brokers’ income falls in return for more work in re-broking or pitching to win new business at a cheaper price; and the client just loses trust and thinks about changing their adviser or going direct.

Where’s the logic and long term thinking? More to the point, where’s the discipline that the market bangs on about so frequently? The clue is in the sentence. “Talks about”. Because if we look back over the past four or five years it’s the only conclusion that can be drawn from a consistent failure to change things. Plenty of talk. Precious little action. And all this at a time when investment income remains at an all-time low.

How much blood must be spilled before the market responds? Will underwriters have to feel the pain of CORs around 120%, market withdrawals and company failures before it finds its way back to some sort of sanity? It’s what needed to happen in the private motor market before insurers saw sense and responded.

So who’s to blame? Is it the broking community exerting heavy pressure on insurers to drive highly competitive terms for their hard-pressed business clients? Or perhaps it’s the clients themselves needing much sharper deals given the recessionary pressures that they’re under?

Whilst there’s probably an element of truth in both scenarios, in the final analysis insurance pricing is still directed, driven and controlled by an army of highly paid, very expert, underwriting, actuarial and risk control professionals employed within the insurer fraternity. They retain the ability to say ‘yes, no or maybe’ to the risks presented and if they really want to change things for the better surely management has the power to do so by moving rates up to boost profitability?

Things certainly cannot go on as they are. The historic, cyclical world of boom and bust pricing just does not hack it in a modern world of ultra-low interest rates and non-existent investment returns.  In any event, brokers and their business clients deserve better and need greater stability and certainty.

Everyone seems to agree that the commercial market needs to harden. But surely the buck starts and stops with insurers to begin to make it happen?

If yesterday’s hearing at the House of Commons Environment select committee on floods proved anything, it is that they must include comparison web sites and major distributors within their probe.

Aggregators’ low-fi approach to selling household buildings and contents cover was highlighted by Association of British Insurers’ Director General Otto Thoresen as rendering the industry unable to accommodate the needs of customers in at risk properties who take it upon themselves to carry out flood proofing works.

Thoreson told MPs: ‘Flood Risk management doesn’t lend itself well …to comparison sites where detail can’t be furnished’ 

Responding to a string of almost identical questions from MPs about how insurers should deal with such a problem, Mr Thoresen said: ”Where the insurer can be provided with evidence that supports the effectiveness of the measures that have been taken, then they want to do the best job they can in assessing the risk that that property brings to them as insurers. But the mechanism in order to achieve that normally would be some sort of assessment by a professional.

“But it doesn’t lend itself easily to some of the methods of buying insurance from the mass market via comparison web site-style approaches where that level of detail cannot really be furnished in a way that’s effective for the underwriter to make his decision.”

The insurance industry is often keen to espouse the idea of customers helping themselves through risk management and MPs were right to bring up this issue at Committee. But as is the case in retail food distribution where the market is controlled by very few companies focused on low-cost products, insurance has become a servant to its distribution network. Mr Thoresen’s comment was nothing if not an admission that even if an individual pays thousands to flood protect his or her property, the insurance industry has become so beholden to distributors, it is simply not economical to underwrite or even assess thousands of at risk properties based on their individual merits.

MPs must talk to aggregators, comparison sites and distributors and understand that the insurance industry is equipped only to carry out a high level flood re or macro pooling exercise. Most of these options have already been placed on the table by the insurance industry; it is time for government to recognise that The Big Society cannot risk manage its way out of this one.

The UK’s leading insurers can maintain their market-leading dividend payments to shareholders despite tough conditions, analysts at Markit said today.

However, in a separate note, Investec maintained its ‘sell’ advice on one of those FTSE 100 companies, Admiral, whom it said would suffer from reduced ancillary income after April 2013 amidst continually rising claims costs.

Analysts at Investec predict Admiral’s income will shrink after April 2013

Markit, which provides dividend forecasting analysis, said the high yields currently on offer in the insurance sector show there are concerns about the sustainability of dividend payouts from these companies. It expects the major players to continue paying at existing levels, but anticipates limited growth in the coming years.

“Yields on equities are of great interest to investors at present. However, high yields must be treated with caution as they can indicate that a dividend is expected to be cut,” the company said in a statement today. “UK insurers currently offer some of the highest yields in the FTSE 100. Despite the tough macro-environment and uncertainty around capital requirements regulation Markit believes the payouts can be maintained.”

The report examines the outlook for dividends from the big payers in the UK Insurance sector in light of challenges such as low interest rates and Solvency 2 regulations.

As referred to earlier, one of the biggest challenges for Admiral, and indeed Aviva, RSA and other players in the UK motor market, will be the banning of referral fees and charges connected to credit hire in the motor claims process. Investec said in its statement today: “We do not buy the idea that a ban on legal referral fees will lower claims costs. Claims costs move upwards continually, it is an immutable law of insurance. Two specific things will hurt insurers from 2013. First the 11th edition of the Guidelines for the Assessment of General Damages published at the end of 2012 recommends Courts to increase damage awards by 9% and the Simmons v Castle ruling will impose a further 10% increase on general damage claims. A 19% rise in all general damage claims this year will occur. Claims volumes would need to collapse to see insurers benefit from legal referral fees exiting the market. We also suspect these may remain in another guise.”

Commentary:

While true in the majority of cases, the Investec note failed to recognise continued pressure on case management fees with charges for claims passed through the fixed cost RTA claims portal system likely to be capped at around £600 from current levels of £1200+. Admittedly there have been delays and challenges to this by the legal profession and the degree of pessimism over insurers’ ability to keep claims costs under control is understandable. However might Investec’s tone change if those measures were implemented? In addition, were the above to happen alongside proposals that cases valued at up to £5 000 should be heard at the small claims court, motor insurers’ handle on claims could be significantly improved. 

The world and his wife seems to have had something to say about the recent BIBA/ABI spat concerning insurer claims handling and I’m afraid I can’t resist adding my own ‘two-penneth’ to the debate.

Let’s begin by being a bit controversial. Actually, I do think insurers have toughened up the way that they manage claims. There, I’ve said it.

Airing dirty linens: Are insurers and brokers damaging their reputation with such public debate?

But surely there is little alternative if they are to continue to protect the interests of their policyholders? After all, according to the Insurance Fraud Bureau undetected general insurance claims fraud is estimated to cost insurers over £2 billion a year and adds £50 to the annual costs of each policyholder. So even though insurance fraud might only be perpetrated by a very small and guilty minority, it is a heavy burden borne by the innocent majority and it needs to be stamped out.

So it’s understandable that insurers and brokers have been investing heavily in the resources and technology necessary to help make this happen. And perhaps there’s the rub. Because however slick and efficient any revised processes might be and however well they are embedded in service protocols; they inevitably present some form of barrier. Whether it is automated application checking with follow up, sophisticated claims screening or more than likely both; there is going to be at least some impact on the way that customers’ claims are managed.

Getting the balance right is accordingly critical if insurers and brokers are to remain effective in looking after genuine customers whilst still investigating and prosecuting the fraudsters. We should certainly not underestimate the challenge, for as we’ve learned from BIBA’s research, there will always be examples of things that can go wrong or could have been done better. And in any event, we already know from the Financial Ombudsman that non-PPI complaints are on the rise – up 12% year on year – so there is clearly some work still to be done.

‘Res ipsa loquitor’ you might think. Yet I believe that we need to be very careful not to equate the necessary tightening of claims and application processes with the (apparently foregone) conclusion that it then results in more dissatisfied customers. Indeed, market-wide customer tracking research that I’ve seen over recent years demonstrates very high levels of satisfaction with motor and home insurance claims handling – while a very significant majority of claimants also believe they are being treated fairly. This should be no surprise either, because insurers and brokers share common ground when it comes to serving customers better. They also share a joint desire to continue to do so as quickly and effectively as possible.

Still, the depth of market feeling during this disagreement was significant and the volume of the resulting media coverage probably means there are some lessons to learn.

Perhaps we should start by recognising that airing such disputes so publicly will undoubtedly shine an unfavourable light on our profession and on the insurance market as a whole and that this takes away from all the good things that we do every day? Shooting first and asking questions later is never the best option. Where’s the value in scoring a few points if it then hurts the market’s reputation universally?

Surely it makes more sense to do as much as possible to protect our collective brand and with this in mind a little more joined up thinking and a bit more collaboration would not go amiss – providing a platform for issues like this before they reach the public domain.

In the fairly recent past the insurance market created a task force of leading players to guard its reputation. Perhaps if such a body were in existence once again BIBA’s research might have been used more constructively to help enhance claims handling and drive improvement. Everyone could have been a winner.

Sadly though, the only victors in this recent spat are probably the trade and national journalists that joyfully filled many hours and column inches promoting a story that at best resulted in a score draw for those involved but was more likely a PR own goal for the market as a whole.

And that seems a shame.