The General Insurance Market in New Zealand - Changes that have taken place during 2001/2002

1. The General Insurance Market in New Zealand - Changes that have taken place during 2001/2002 Janet Lockett New Zealand Society of Actuaries Conference Rotorua - November 2002 Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

2. Year 2001 was ... “... one of the most traumatic in the history of international insurance and will define much of the insurance thinking and planning for decades to come.” Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

3. Thanks Many thanks, for providing valuable input and assistance, go to: Andrew, Chris, Duncan, Fiona, John, John, Karl, Lynda, Paul, Peter, Phil, Richard, Rob and Rod Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

4. Special features of the NZ general insurance market • Size, development, location • ACC • EQC • Regulation Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

5. The Insurance cycle Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

6. The Insurance cycle Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

7. Situation in 1999/2000 • Deteriorating claim features • Large losses • Continuing competition • Reduced investment returns • Some premium increases, but • still under-priced • still slack underwriting Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

8. September 11 Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

9. Other aspects and consequences • Economic losses • Stock markets • Solvency of insurers/reinsurers • Return to basics Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

10. Basic principles • Good information • Underwriting standards • Pricing • Return on capital • Relationships • Risk management Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

11. What is an insurable risk? • The circumstances of a loss event and the amount of a loss must be able to be clearly defined • The occurrence of a loss must be the result of chance • The frequency and severity of a loss must be quantifiable • It must be within reasonable limits Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

12. Good underwriting procedures • Good data • Clear policy conditions • Detailed information about each risk • Detailed analysis of experience Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

13. Are terrorism risks insurable? • Can the possible circumstances of a loss event and the amount of a loss be clearly defined? • Will a loss be the result of chance? • Can the frequency and severity be quantifiable? • Is the risk within reasonable limits? Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

14. If terrorism risk is to be insured - Should it be provided by • the private sector, or • the public sector, or • a combination of both? Can it be both widely available and generally affordable? Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

15. Are terrorism risks insurable? Is terrorism insurable - but only on the same terms as war risks? Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

16. Risk management cycle Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

17. Risk management cycle IDENTIFY What risks exist ADMINISTER Analyse, monitor QUANTIFY & CONTROL Mitigate, reinsure, risk share, restrict FINANCE Price appropriately, hold capital Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

18. New capital - new RoE requirements Implied combined ratios Past performance Return on equity CR% Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

19. Basic principles • Good information • Underwriting standards • Pricing • Return on capital • Relationships • Risk management Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

20. Data Policy conditions Earthquake cover Reinsurance Pricing the risk Relationships - risk management Commercial property and business interruption Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

21. NZ vs overseas Availability Data Policy conditions Pricing Relationships - risk management Liability Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

22. NZ vs overseas Commercial motor Private motor Factors affecting costs Motor Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

23. Data Aggregation of risk Other factors Pricing Householders and other business Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

24. A flatter insurance cycle? Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

25. Keep on applying the basics or return to competition? Will standards fall? Will the insurance cycle continue and if so, will it be flatter? The Future: Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

26. What will the reinsurance market be in some years time? Will ART become more important in global insurance markets? How might ART affect the NZ market? What about captives? The Future: Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

27. Ratings Solvency Risk margins Powers of intervention by regulatory authorities Regulation of general insurers Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

28. Accounts and tax • Accounting standards • Taxation Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

29. Actuarial Control cycles Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

30. Actuarial control cycles Data analysis Premiums Reserves and risk margins Capital allocation and RoE Asset/liability modelling Risk management Actuaries can add value Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate

31. Have insurance markets suffered severe shocks in the past and survived? Does the industry learn from its experiences and develop new strengths? Closing thoughts Melville Jessup Weaver A Towers Perrin/Tillinghast Affiliate