31 st Annual GIRO Convention

1. 31st Annual GIRO Convention 12-15 October 2004 Hotel Europe Killarney, Ireland

2. Current Developments in the Irish Insurance Market Joe Kennedy Ger Bradley David Costello

3. Questionnaire What is the current issue that you think is the most important and should be discussed? (in 10 words or less please) David will collest you answers from you now - before we put our agenda up!

4. An Aside – the Insignia of the SAI • The "t" - • William Sealy Gossett • 1899 to 1935 work for Guinness, Son and Company in Dublin • Wanted to derive statisically valid conclusions from to small samples • Therefore invented Student “t” test • Guinness is officially Good for Actuaries • The Hour Glass - taken from the Institute of Actuaries’ insignia. • The Harp - representing Ireland. • The Owl - taken from the Faculty of Actuaries’ insignia. The second and fourth sections represent the fact that actuaries qualify in Ireland by becoming Fellows of the Institute of Actuaries in London or of the Faculty of Actuaries in Edinburgh.

5. Current Developments in the Irish Insurance Market • Questionnaire (DC) • Recent market Results & Trends (JK) • PIAB (GB) • Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance (GB) • Statement of Actuarial Opinion (DC) • Peer Review (DC) • International Issues (DC)

6. Current Developments in the Irish Insurance Market • Recent market Results & Trends • PIAB • Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Statement of Actuarial Opinion • Peer Review • International Issues

7. Market Trends – Population

8. Market Trends – Vehicles

9. Market Results – GWP 2003 GWP €4,239m … (€3,954m in 2002) • Motor €1,895m • Property €1,158m • Liability €860m • PA/ Travel €77m • Other classes €250m

10. Market Results - GWP

11. Market Results - GWP

12. Market Results – Underwriting Result

13. Market Trends – Premium Levels “Insurance Premiums Have Fallen to 2000 Levels” … IIF press release, 16th July • “If the recent AA survey is taken into account, which found reductions of 22% in the past year, motor premiums are already back to 1999 levels.” • “a representative of the Construction Industry Federation stated in its evidence to the committee that its members, “are generally experiencing a 25% drop in renewal premiums. Furthermore, firms that had great difficulty obtaining a single quote in 2002-03 now seem to be able to get three to four quotes when renewing a year later.”

14. Market Trends – Severe Weather Forecast this! • 1997 – December – Storm €84m • 1998 – December – Storm €56m • 1999 – • 2000 – November – Flood €51m • 2001 – December – Freeze €30m • 2002 – February – Flood €37m, November – Flood • 2003 – • 2004 –

15. Market Trends – Weather

16. Market Trends – Weather

17. Market Trends – Road Deaths

18. Market Trends – Hospital Admissions “Hospital admissions fall 36% after penalty points” … Irish Times 1st Sept • Road traffic accidents, Cork University Hospital, 1st year • “We have noticed that the number of attendances seems to be on the way up again. I guess the honeymoon period is over” … Dr John Street, senior specialist registrar orthopaedics

19. Market Trends – Workplace Accidents “However we are pleased to see a reduction of 15% in the rate of injuries and ill health for workers since 1999. Ireland now has the lowest rate of injuries in the EU and I have no doubt this has been due to our continued ability to meet our key objectives. I am confident the Authority will continue to do so in 2004.” … Frank Cuneen, Chairman, HSA

20. Market Trends – Fraud “We Irish are renowned for issuing proceedings” … Irish Examiner, 24th September • PrimeTime Special • Insurance Confidential • Sworn Affidavits • False or Exaggerated claims … €100k/ 10 years

21. ESA - Equal Status Act • Irish Legislation • 11 grounds incl. Age & Gender

22. Market Trends – PIAB “New Personal Injuries board leads to rise in court awards” … Sunday Business Post, 22nd August • “We believed that if PIAB was to be successful, it had to offer generous damages – and that would have a knock-on effect on court awards.” … Hugh Mohan, chairman of the Bar Council

23. Current Developments in the Irish Insurance Market • Recent market Results & Trends • PIAB • Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Statement of Actuarial Opinion • Peer Review • International Issues

24. PIAB - the process • Claimant rings 1890 number based on Cork • Will be asked whether the respondent (policyholder) has been put on notice – must do so first • If OK – brought through process – and sent claims form incl. medical report form from their treating doctor • PIAB will then send the respondent an informal notice of claim • The PIAB will wait full documentation from claimant (+€50) before officially registering the claim – when this is done – the statute will go on hold • When so registered, PIAB will send respondent a copy of all documentation received – and insurer major documentation only • Respondent has 90 days to advise whether the case is one for assessment by PIAB or not • PIAB does assessment only cases – if Liability is in dispute – won’t handle

25. PIAB - the process • If the Respondent (& Insurer???) is happy for PIAB to handle, then the insurer should send the fee for €850 to PIAB • If no word is received then PIAB will assume liability is admitted • If it is believed to be a try-on, then the insurer should handle themselves • If Respondent / Insurer refuse to allow the claim to proceed, then the claimant will be issued with a release letter • The insurer is free to settle the claim within this 90 day period, and indeed any time after the 90 days (but if after 90, upfront fee is payable)

26. PIAB - the process • The PIAB have to make an assessment within 9 month of registering a claim – can have an extension of a further 6 months by agreement • If they feel it unsafe or premature to issue an assessment at this stage, intend to issue a release certificate at this stage (back problems …) • Once PIAB have made an assessment – claimant has 28 days to accept, respondent has 21 days

27. PIAB - the Result • Should eliminate all legal fees on non-complicated assessment only cases on EL, PL & Motor • But • Now for the “cup is half empty” story . . .

28. PIAB - the possible Downside • Civil & Liabilities Courts Bill requires judges to take account of PIAB Book of Quantum (BOQ) • But BOQ generally believed to be about 1/3rd more than average settlements on lower cost claims • Believed to be too light at upper end – where it is assumed courts will stay with current values - as “shall not operate to prohibit a court from having regard to matters other than BOQ” • What will happen those in between - rising tide . . . • Impact existing cases and new cases • Could fuel increasing frequency of low value claims as Joe Public hears the good news • The wide range in the BOQ gives courts scope to inflate medium severity cases while still staying within the bands

29. PIAB - the possible Downside • Respondent decides whether a case goes to PIAB or not • This is the policyholder • The MIAB were very critical of insurers settling against insured’s wishes - this looks like the device to address this concern • Most drivers do not accept responsibility for accidents - so into the court we go at the policyholders discretion

30. PIAB - the possible Downside • Current Legal challenge to PIAB • Right to legal representation • Courts likely to uphold • Could be a constitutional issue - referendum - messy • This will introduce legal costs into PIAB • Lawyers will then be reluctant to engage in “no-fee” pre-PIAB negotiations - which if successful protected the industry from court appeals from PIAB • Lawyers can then have 2 bites at the cherry - both with fees • Only way for PIAB to avoid appeals is to up the settlements, this in time will up the BOQ values - which will feed into the courts - vicious leap-frogging circle ...

31. PIAB - the possible Downside • IIF study shows that legal fees on motor injury cases have gone from 38% in 2001 to 41% in 2003 (for EL gone from 45% to 52%) • Average damage values were dampening - this was felt to be the way to get the same monetary income from these cases • If damages go up as speculated in previous slides - no doubt the percentage costs will not decrease to previous levels • As reflected in the above costs increases, the taxing masters have been increasingly generous to lawyers - unlikely to change spots now

32. PIAB - the possible Downside • Summary • CLCB & BOQ => increasing lower and middle range awards • => increasing claims frequency soft tissue / whiplash • Proces so easy => increasing claims frequency soft tissue / whiplash • Respondent => very few motor claims -> PIAB • Leagal Representation => legal fees in PIAB + higher costs & Freq • Rise in legal fees => higher awards, higher frequency, higher legal fees

33. PIAB - the possible Downside • Summary • All in the garden is not rosy!!! • I sincerely hope PIAB works • The general consensus which I share is that the PIAB will work • Great political will to get it this far so quickly • That will is still there - if there are hick-ups • But the lawyers have not gone away you know • There is a significant downside risk - history has taught us that

34. PIAB - the possible Downside • Questions / Observations ???

35. Current Developments in the Irish Insurance Market • Recent market Results & Trends • PIAB • Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Statement of Actuarial Opinion • Peer Review • International Issues

36. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • IFSRA established on 1st May 2003 • Responsible for regulation of all financial services firms in Ireland • Also has an important consumer protection role • Paper presented to IFRSA Jan 2004 - authored by members of GI committee of SAI, and approved by Council of SAI • Impetus for Paper • came from an informal discussion between a delegation from the SAI and IFRSA - it would be nice if you prepared a brief paper on ... • Purpose of paper • provide a brief overview of actuarial involvement in management of non-life insurance • consider potential role for actuaries in future regulation of non-life sector

37. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 1 - History of actuarial involvement in non-life • Section 2 - Reserving • Section 3 - Pricing • Section 4 - Corporate Risk management etc. • Section 5 - Prudential supervision - International approaches • Section 6 - Available options for future supervision in Ireland • Section 7 - Considers present and future statutory role • Going to skim very quickly over chapters 1 to 6 (available on Internet) • Idea is to exchange views on proposals in Section 7

38. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 1 - History of actuarial involvement in non-life • Up to early 80’s no involvement in Ireland (60’s UK - Johnson & Hey 1968) • Introduction of non-Life Directive 1976 - more systematic approach to reserving • Collapse of PMPA 1983 & ICI 1985 help actuaries get a foot in! • Internationally life assurance from the beginning was based on actuarial principles • Many of the classes written by GI companies were much riskier • Looked on a short-term - therefore could adopt a more ad-hoc approach • Therefore financial consequences of a non-actuarial approach appeared limited! • About 50 non-life actuaries in Ireland - about 25 Direct Domestic, 20 RI/Captive, and 5 in consultants

39. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 2 - Reserving • Key Role • Communication with claims and legal v imp • Variety of statistical techniques • Judgement of experienced actuary, understanding of methodologies, knowledge of underlying data and processes of undertaking • Blind application of any statistical method can produce misleading results • The most appropriate method depends on nature of underlying data • Various reasons for calculating claims reserves - the purpose of the exercise is a factor in the level of prudence used

40. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 3 - Pricing • Return on Capital • state of cycle • appetite for growth • volatility of class • a decision of account owners - UW’s and CEO • Pricing Basis • Expected Claims Cost • Claim Handling • RI premium and recoveries • Commission • ROC & Investment Income Statistical Analysis of past claims, relevant exposure and rating factors Same ROC on all segments? Statistical confidence at segment <<100% Resulting essence of competition UW Judgment the larger the policy Experience Weighted Quotations Deductible Pricing E&E or Agg

41. What are key risks deserving senior management attention? What is the optimal profile of assets / liabilities? How much capital is needed and how allocated per class? How should we assess the performance of each segment? Optimize RI programme How should we measure non-financial risks? How to Maximize ROC? Section 4 - Corporate Risk Management capital management business planning operational risk assessment Operational Risk is an area where methods are only now developing and data just being collected Actuaries involved in modelling these risks and their relationships using simulation tools Extreme events are scenario tested The questions actuaries seek to answer are: Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance

42. Actuarial Certification has been introduced in a number of countries to provide early warning signals The following US based table shows the reason for US failures - many of which are due to reserve problems Section 5 - International Non-Life Prudential Supervision International Failures of GI companies are not rare - the following shows the annual default rate of UK GI & RI undertakings: Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance

43. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 5 - International Non-Life Prudential Supervision (cont) • Insolvency has social and economic consequences. • PMPA: concern that reduced insurance capacity would lead to severe difficulties in obtaining coverage and an increase in uninsured driving • HIH in Australia led to a severe reduction in insurance capacity in some sectors of the economy and to cessation of building work in New South Wales for some time.

44. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 5 - International Non-Life Prudential Supervision (cont) • UK: Lloyds introduced actuarial certification of syndicate reserves when Equitas (the Lloyds rescue vehicle) was established • Outside of this “Freedom with Publicity” - required to provide detailed statistical information on a public basis • Can require companies to have actuarial reviews performed e.g. Weavers, which shortened the insolvent trading period & saved the tax-payers money • Now moving towards capital adequacy models (ICA’s) • US: Actuarial certification in place for many years • Report must be made available to the board, though only mandatory to present it to board in Florida

45. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 5 - International Non-Life Prudential Supervision (cont) • Canada: appointed Actuary for Life & Non-Life • to report on the company’s insurance liabilities on an annual basis • to submit an annual report to the regulator on the current and expected future financial condition of the company • to report on any matters that may have an adverse effect on the company’s solvency. • The annual investigation examines the sensitivity of the company’s solvency position to changes in the economic environment and changes in claims experience, amongst other factors, using the techniques of “dynamic solvency testing”. • The Canadian Institute of Actuaries has produced professional guidance covering the types of sensitivities that should be tested.

46. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 6 - Philosophy of Insurance Regulation in Ireland • IFSRA has 2 potentially conflicting roles - prudential supervision and consumer protection • Prudential supervision: • “no failure” approach • “freedom with publicity” (the traditional Anglo Saxon model) • a non-interventionist stance (caveat emptor), as applies to Reinsurance • Choice may depend on markets being served - personal lines etc. • Issue of harmonization within EU & globally - Basel II accords - may bring greater consistency between non-life, life & banking supervision • Have to consider delegation, the cost and who pays

47. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 6 - Philosophy of Insurance Regulation in Ireland (cont) • Consumer protection • Permissive • (frequently referred to as a “normative” approach) • relies on market competitiveness, commercial and entrepreneurial motives to ensure customer interests are met. • In this scenario, the regulator typically monitors market operation and regulates distribution, the sales process and communication with customers. • Prescriptive: • A prescriptive approach may require insurers to submit some or all of the following; details of products, marketing materials, policy wordings and rates. • The regulator may require this to be done on a “file and use” basis, or may require that regulatory approval is obtained • Tariffed markets were abandoned in the UK and Ireland some 20 years ago • Profit margins have reduced in the period tariffs were abandoned

48. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 7 - Present and Future Statutory role of Actuaries in Ireland • The current statutory role for the actuary in non-life insurance is limited to the provision of an annual Statement of Actuarial Opinion (SAO); this was first introduced in 2001. • The SAO certifies that the reserves, gross and net of reinsurance, are greater than the actuary’s best estimate of the liabilities as at the reporting date. • The actuary is not required to consider the interrelationship between the liabilities and the corresponding assets, the nature of the reinsurance programme or the overall solvency position. • The SAO is a “point-in-time” opinion and the actuary is not required to monitor the position on an ongoing basis or to model the expected position at any future date.

49. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 7 - Present and Future Statutory role of Actuaries in Ireland (cont) • If IFSRA wished to extend the statutory role of the reporting actuary, this could potentially be done in the following ways: • The SAO could be extended to include an opinion on the overall solvency of the company at the reporting date. • This requirement could, over time, be extended to continuous monitoring of the solvency position throughout the year. • The SAO could be supplemented by a periodic “financial condition report” - which would analyse the potential future development of the company’s solvency position.

50. Paper to IFRSA (Irish Regulator) on role of Actuary in General Insurance • Section 7 - Present and Future Statutory role of Actuaries in Ireland (cont) • Prudential supervision of non-life insurance could be strengthened by extending the statutory role of actuaries. • Necessary and appropriate to do so in a series of incremental steps, in the order outlined above. • The current system of SAOs is of relatively recent origin and it would be desirable that it be given some further time to mature and consolidate. • There could potentially be resourcing issues if further statutory requirements were introduced within a short timeframe. • It would also be appropriate to consult with the industry and other stakeholders in relation to any extension of the statutory actuarial role.