We can help with more than just Insurance Buying…

Mergers and Acquisitions (M&A):

Acquisition of a target company (TargetCo)

  • We identified potential exposure to industrial diseases (asbestos, deafness and others)
  • We realistically valued these liabilities, noting that asbestos claims from females not expected to peak until c2028
  • TargetCo had significantly underestimated the extent, leading to a purchase price adjustment to enable the acquisition to proceed

“Actuaries are deeply embedded in setting insurance premiums for insurers – insureds need to have an actuary on their side to level the playing field.”

Insurance Schemes:

Information asymmetry: unwarranted price increases

  • Insurance schemes are extremely common, for example,
    • motor retailers offering “free 7-day cover” in order to increase retail car sales
    • general extended warranty cover (“white”/”brown” goods e.g. TVs, washing machines, mobile phones etc.).
  • The underlying insurer charge premiums to the retailer (which are passed on to the customer with additional commission etc),
  • The fundamental principle that actuaries bring is that “loss ratios” (claims ratios) are usually misleading as an estimate of account profitability; they are an estimate based on the (usually substantial) reserves for outstanding claims
  • We have reviewed many insurers’ scheme pricing models, finding insurers pushing for rate increases unsupported by sufficient actuarial information. In one example, the data provided to support a rate increase of 10% was subsequently found to be false (due to conservative initial case reserving); this could have been forecast using the insurer’s published regulatory filings but which were not shared by the insurer with the retailer. This led to fewer policies being sold, unjustifiably, hitting the retailer’s bottom line.
  • Actuarial support can level the playing field for companies running insurance schemes. Sometimes premium increases are necessary, but they should be based on a level playing field of information, rather than information asymmetry.

Solvency II:

Why it matters to Insurance Buyers: think like an insurer!

  • Solvency II’s fundamental principle is that insurers should charge sufficient premium what could happen over the policy term, rather than what has actually happened in the past (e.g. the past loss ratios/claim ratios).
  • Thus saying “I’m a good risk (because I’ve had few claims in the past)” is meaningless under Solvency II
  • Insurers are now concerned about their EMLs (expected maximum losses, also known as RDSs, realistic disaster scenarios); if these are not included in your insurance renewal submission, the premium will be higher (or, in a recent case, the risk will be declined, after many years of stress-free renewals) than it would otherwise have been.
  • By understanding how to present risks under Solvency II, what insurers actually do with the your insurance renewal data and how insurers develop the premium (e.g. the solvency capital required for your policy wordings, fair ROCs and assumed loss ratios and expense ratios), actuaries can help insureds effectively challenge premiums at renewal.

“Most insurance structures are sub-optimal; with better visibility on the frequency and severity of ‘rare’ claims and data from insurers’ regulatory filings, most insureds can minimise their total cost of risk by using different risk financing structures.”

  • In a recent case we assisted a client to understand why their current insurer was now declining renewal (despite no claims to date); the current broker was unable to place an identical replacement policy. With actuarial assistance to redesign the renewal presentation (to make it “Solvency II friendly”) and provision of information to the insurer on likely EMLs, satisfactory cover replacement cover was easily obtainable. Essentially the renewal presentation was now written by an actuary for an actuary (the insurer’s actuary), i.e. Solvency II “friendly”.

Risk financing:

Insurance isn’t the only option, in fact, it’s often the most expensive option in the long-term

  • Insurance is just one means of risk financing; insurers take risk by having long-term views and substantial benchmark data
  • For example, most private equity (PE) backed companies typically have a medium-term (5-year) exit strategy. Over this time a large claim may or may not occur and the PE owners will generally buy “excessive” amounts of insurance to minimise the impact if a large loss should occur. However, this comes at considerable expense (insurance premiums). Over a much longer period (10-15 years) such large losses are generally predictable; therefore, taking a longer term view, with contributions to an internal self-insurance fund, the entity will be better off buying less insurance and accepting that, during the 10-15 year time period, a large loss will almost certainly happen (but will be pre-funded).
  • Furthermore, published regulatory filings of UK insurers show that, on average, they pay claims 2-3 years after premium receipt due to negotiation, litigation etc.). Large injury claims can take 10+ years to settle. By retaining premiums in-house, insureds keep the investment income, which is generally not taken credit for in the premium calculation, thus is a pure bonus to the insurer and provides a considerable buffer in the event of worse than expected claims.
“Insurance premiums are essentially an (expensive) fee for renting the insurer’s balance sheet. If your balance sheet is large, you don’t necessarily need access to someone else’s!”

  • Thus, with a suitably provisioned internal self-insurance fund, a suitable annual contribution into the fund, and suitable catastrophe cover (with or without an offshore captive), most organisations can significantly improve their total cost of risk by buying less insurance. An additional benefit is that if the risks do not eventually materialise, the reserves can be released to P&L. With insurance, you will never get a full refund of premiums if you have no claims.

“Ask John to perform his version of search and destroy on your premiums”

“Ask John to perform his version of search and destroy on your premiums”