The collapse of Independent Insurance means everyone's talking about what that portends for the industry. Mike Jackman, underwriting director, UK Commercial, Royal & Sunalliance, offers his two cents.
What effect, in your opinion, will the collapse of Independent Insurance have on the commercial lines market ?
We operate in a market that is both diverse and complex. If we are to avoid a repeat of another insurance company collapse, the industry as a whole needs to take a very close look at the way it both prices and underwrites certain commercial classes of business, particularly liability. In our opinion, through taking time to review the risks we have been shown, it is clear that pricing was totally inadequate in most instances.
While the market will remain competitive, we can expect some significant increases for some commercial risks previously underwritten by Independent.
Overall, however, I believe we will see more realistic prices post-Independent. It must be clear to everyone involved in commercial insurance that no company can consistently charge much lower rates than everyone else and stay in business. Independent provided unrealistic downward pressure on rates; its collapse will lead to an inevitable correction in pricing to a level that ensures the industry can make a sustainable return on capital.
The collapse of Independent and the resulting investigations by the Financial Services Association (FSA) and the Serious Fraud Office (SFO) into the events leading up to this will lead to a long overdue and extensive debate on the wider issue of industry regulation.
There has been talk of premium rises in the commercial market which will reflect the rising claims costs better - how true is this ?
With changes in legislation and following the dawn of the no win, no fee culture, prices are set to rise. We cannot hide from the impact of this legislation and, if we are to reserve appropriately, we must charge the appropriate premium. As a consequence, no win, no fee has to be factored into the overall risk assessment and ultimately the premiums we charge.
No one can get away from the relationship between claims trends, reserving adequately to cater for these trends and the ultimate paid costs of the claims once settled.
There has been a significant increase in the frequency and average cost of claims driven by social factors - the compensation and blame culture in the liability classes, but also, increasingly, theft and arson.
Added to this are many legal and political reforms which push up the eventual cost of claims, for example, lower discount rates and NHS recovery charges.
The number and cost of claims are rising and this needs to be reflected in higher premiums. Successful companies will be those able to respond to the changing legal, regulatory and social environment. They will need to anticipate and respond to future claims trends through adequate pricing in today's market.
Do you think insurers have been using risk management as effectively as they could in this sector ?
It is difficult to provide a general industry comment on this. Royal & Sunalliance has defined principles and a great deal of collective expertise in the discipline of underwriting and risk management.
While it is not feasible or practical to manage every risk for every eventuality, we maintain that strong underwriting standards aligned to a fair and competitive price are the cornerstones to risk management - in getting both aspects right, we take a responsible position within our marketplace .
Commercial clients themselves can also look at the risks they pose and what they can do to best manage them. Those clients can reassess their own approach to risk management and, where appropriate, put in measures and changes that provide the insurer with the most acceptable risk and in turn, their business with the best possible terms and premium.
Risk management is, however, a partnership between insurer, broker and customer and all these have to be committed to it. Insurance is no substitute for prudent risk management and an investment now in better safety can pay dividends not just in lower premiums but in the main reason for doing it in the first place - business continuity.