Costly Ratios

Insurers, worried about the rising cost of claims, are implementing a management strategy to stem losses.

All insurers want to drive down the cost of claims, and some companies are achieving this aim better than others. In 2000, the claims ratios of the top 20 general insurance groups varied from 21% to 104%, reflecting how the claims pain differs for each company.

The claims ratio is a common measurement of the costs to insurers, mainly from paying claims. It is sometimes also known as the loss ratio. It is calculated by taking the sum of claims for each company plus the change in the provisions they made for claims. This is then divided by the net premiums earned. A higher number reflects high claims during the year.

The claims ratios of the top 20 groups for 2000 tell the story of a year when the country was hit by weather disasters. Thousands of homes were flooded as England and Wales suffered the wettest autumn since records began in 1766.

Many analysts believe the floods increased the claims ratios of some of the big players - such as CGNU, Royal & SunAlliance (R&SA) and AXA - by as much as four or five percentage points for 2000.

The table, overleaf, shows only non-life insurance and will mostly reflect claims in classes of business such as motor and property for both personal and commercial lines. It is also based on the group rather than individual companies so, for example, the figure for Allianz includes data from its subsidiaries Cornhill, Euler Trade Indemnity and Trafalgar Insurance.

The figures reflect insurers' different ways of doing business. The high figure for Swiss Re and low figure for Munich Re indicate their involvement in substantially different markets from many of the others in the table.

Managing director of business solutions for loss adjusters Crawfords, Jonathan Clark, says all the groups in the table should be trying to drive down the cost of handling their claims.

He says: "Insurers' real business is settling claims from policyholders. So at one level we shouldn't be surprised that the claims ratios are at any particular level. But the real question is whether that level is too high. And the answer is, yes, it is.

"The focus is on how best to manage the claim. Insurers are now seeing claims management as a strategy. They are increasingly analysing how they want to provide the service and are looking to experts in claims handling to integrate an approach into their business system."

Clark says the current trend involves insurers regarding claims as incidents requiring immediate action to cut the time - and cost - taken to process the claim.

"The theory is that if you start to manage a claim as an incident, you start to address it immediately and the cost of handling the claim starts to decrease. All of us in the industry are trying to reduce the number of times a file is touched."

Clark adds that responding rapidly to a claim and achieving consensus with the customer about the required action also helps to reduce fraud.

NFU Mutual spokesman Tim Price says the insurer's claims ratio was driven higher than expected in 2000 by the flooding, but also by steeply rising liability settlements, which had hit the agricultural sector particularly hard.

"There were two main factors of concern in 2000. The flooding and storms in the autumn resulted in claims bills three times higher than expected from weather-related events.

"The second factor, of perhaps even greater significance for us, was an escalating bill for compensation payouts in personal injury cases and liability claim settlements.

"The market in general has experienced a rise in claims, but a sharper rise in settlements."

He said farmers and rural businesses - which have traditionally accounted for the bulk of NFU Mutual's policyholders - had experienced particularly high numbers of claims for accidents to employees and from third parties.

Examples included farm workers suffering injuries at work, claims for environmental damage and businesses such as food processors receiving claims for food poisoning.

This is part of a growing trend, and NFU is diluting its exposure to the agricultural sector and now receives less than 50% of its premium income from farmers and rural businesses.

Its other strategies to cut the claims ratio are to raise premiums for liability and increase its risk management work.

Price adds: "There is a need to increase premiums for liability insurance but we also need to bear in mind that agriculture is still in the depths of a tremendous recession from the farm income crisis and the foot-and-mouth outbreak of last year.

"The increases will have to be done steadily, but there's no doubt they will have to go up."

Outsourced work
Royal & SunAlliance's UK managing director of personal lines services, Steve Broughton, says his company's claims ratio looks worse than it should.

He says the insurer took into account the cost of running the company's claims handling department, known as the Claims Advisory Service. Other companies outsourced this work, cutting their claims ratio.

"We have never set a target that we must get to," he says. "We've taken quite a different philosophy from others and it certainly doesn't give us credit where analysts are concerned.

"But the Claims Advisory Service is counted as a claims expense because it is in-house staff. It doesn't make our expense ratio look as good as it might do otherwise."

Claims ratios of UK top 20 insurance groups in 2000 (%)
1 GE Insurance 21

2 Lloyds TSB Group 38

3 Legal & General 64

3 Munich Re 64

5 Direct Line/Privilege/UK Ins (RBS) 72

6 Winterthur 76

6 Prudential Group 76

8 R&SA 79

8 Fortis 79

10 Allianz 81

11 AIG 83

11 CGNU 83