australasian universities risk insurance management society conference 2005

1. Australasian Universities Risk & Insurance Management Society Conference 2005 Thank you, Mark, for the introduction. I want to take you back in time before we start to look forward.Thank you, Mark, for the introduction. I want to take you back in time before we start to look forward.

2. The late 1990�s saw a highly competitive insurance market with unsustainable premiums and poor underwriting practices. This, coupled with the advent of aggressive plaintiff lawyers fuelled by such advertising gems as �cash for crash� and the fact that many insurance companies considered it more prudent to pay out personal injury claims than run the risk of losing in court, meant that the inevitable train smash grew likelier by the month. The late 1990�s saw a highly competitive insurance market with unsustainable premiums and poor underwriting practices. This, coupled with the advent of aggressive plaintiff lawyers fuelled by such advertising gems as �cash for crash� and the fact that many insurance companies considered it more prudent to pay out personal injury claims than run the risk of losing in court, meant that the inevitable train smash grew likelier by the month.

3. The role of insurance in society is to increase financial certainty in the case of catastrophic loss

4. Market Conditions So where are we now? The insurance market is cyclical. I believe that we have climbed the hill (or the wave if we use the earlier allegory), we�ve staggered over the crest and we�re now starting to slide down the other side. If we look at the market clock on the screen, I would say that we�re probably somewhere between 12 and 1. Insurers are undoubtedly making some money, reinsurance capacity is more readily available and premiums are beginning to drop as evidenced by Suncorp�s announcement recently that they will be offering reduced premiums at renewal. The interesting point is that this slide was first shown back in 1986 when we were also experiencing a hard market. Some lessons don�t seem to teach!So where are we now? The insurance market is cyclical. I believe that we have climbed the hill (or the wave if we use the earlier allegory), we�ve staggered over the crest and we�re now starting to slide down the other side. If we look at the market clock on the screen, I would say that we�re probably somewhere between 12 and 1. Insurers are undoubtedly making some money, reinsurance capacity is more readily available and premiums are beginning to drop as evidenced by Suncorp�s announcement recently that they will be offering reduced premiums at renewal. The interesting point is that this slide was first shown back in 1986 when we were also experiencing a hard market. Some lessons don�t seem to teach!

5. The 21st Century Then early in the 21st Century, the train left the rails. We saw the collapse of HIH, one of the principal underwriters of Liability insurance in Australia, followed closely by the devastating terrorist attacks on the World Trade Centre in New York. A number of Insured�s transferred their business following the collapse of HIH to the Independent Insurance Company in the UK, who returned the compliment by also going broke a couple of months later, producing a classic �double-whammy�. Add to the mix the normal catastrophes that the insurance market faces every year in some part of the globe, and an increasingly fragile insurance market went into �melt down�.Then early in the 21st Century, the train left the rails. We saw the collapse of HIH, one of the principal underwriters of Liability insurance in Australia, followed closely by the devastating terrorist attacks on the World Trade Centre in New York. A number of Insured�s transferred their business following the collapse of HIH to the Independent Insurance Company in the UK, who returned the compliment by also going broke a couple of months later, producing a classic �double-whammy�. Add to the mix the normal catastrophes that the insurance market faces every year in some part of the globe, and an increasingly fragile insurance market went into �melt down�.

6. Market Cycle Years Time 1995 1999 1 O�clock to 5 O�clock 2000 2004 6 O�clock to 12 O�clock 2005 ? 1 O�clock to ?

7. Property and Business Interruption Portfolio premium Actuarial advice on Expected claim levels Administrative expenses Desired level of reserves Profit margin

8. Property and Business Interruption

9. Property and Business Interruption Loadings Inferior construction Cyclone / earthquake zones Lack of physical protection Claims history

10. Property and Business Interruption Rate applied to declared Property and Business Interruption values. Example 0.10% x $125,000,000 = $125,000 (plus GST / FSL / Stamp Duty as applicable)

11. General Liability Public and Products Liability Long Tail Liability Concepts Rating Factors Impact of Tort Law Reform

12. Concept of the Long Tail of Liability Claims Public Liability is considered a form of long-tail insurance.

13. Concept of the Long Tail of Liability Claims Whilst Public & Products Liability claims are not all that frequent, when they do happen the cost is substantial when compared to consumer claims such as private motor vehicle.

14. What makes up a Liability Premium?

15. What makes up a Liability Premium? Breakdown on Premium Components

16. What makes up a Liability Premium? How are Public & Products Liability Insurance Premiums calculated?

17. Impact of Tort Law Reforms

18. Impact of Tort Law Reforms Reforms were aimed at reducing the frequency of small claims���

19. Impact of Tort Law Reforms What about those that are catastrophically injured?

20. Motor Vehicle Types of Premium Rating methods Unit Cost basis � Motor fleets �Burning Cost� basis

21. Motor Vehicle Unit Cost Basis Type of vehicle Modifications Principal drivers Area garaged Previous convictions Claims history

22. Motor Vehicle Unit Cost Basis Base rate per vehicle, say $400 per unit Number of vehicles in fleet, say 150 vehicles Annual premium calculation $400 x 150 = $60,000 (Plus GST and Stamp Duty as applicable) Claims experience discount

23. Motor Vehicle Burning Cost basis Annual Premium Calculation, say $60,000 Minimum & Deposit Premium, 75% = $45,000 Adjustable on claims paid and incurred Claims, say $40,000 Adjustment factor 100/70 $40,000 x 100/70 = $57,143 Less Deposit of $45,000 = $12,143 Maximum Premium � 125%

24. Methods for Reducing Premiums Retain more risk Higher deductibles / excesses First loss sums insured Reduce coverage Fire & perils instead of physical loss Motor vehicle third party only instead of comprehensive Retain certain classes of insurance Machinery breakdown Fidelity Guarantee

25. Risk Financing Options Traditional expense management Corporate internal fund Discretionary mutual fund Captive insurance company / protected cell captive

26. Insurance Decision Framework

27. Allocation of Premiums and Other Costs Costs Premiums Administration Fees Deductibles / Excesses Legal Uninsured / Self-Insured Risks

28. Allocation of Premiums and Other Costs Provide incentives for loss control Distribute risk financing costs equitably throughout the organisation Reflect loss experience Stability Maintain data and documentation

29. Questions What do I see as the outlook for the buyers and sellers in the insurance market as we go forward? I�m feeling quite bullish about the future as a matter of fact. I think as a result of improved underwriting results, proactive intervention by the Regulators and a clearer understanding of the insurance market dynamics by all stakeholders as a result of the Public Liability crisis, we can look forward to a stronger, more competitive and better educated market place. Only time will tell. Ladies & Gentlemen, thank you very much for your attention. What do I see as the outlook for the buyers and sellers in the insurance market as we go forward? I�m feeling quite bullish about the future as a matter of fact. I think as a result of improved underwriting results, proactive intervention by the Regulators and a clearer understanding of the insurance market dynamics by all stakeholders as a result of the Public Liability crisis, we can look forward to a stronger, more competitive and better educated market place. Only time will tell. Ladies & Gentlemen, thank you very much for your attention.