Emerging markets are showing a worrying rise in bodily injury claims

The motor insurance market crisis playing out in the UK could eventually be felt across the world, according to RSA emerging markets chief executive Paul Whittaker. The problem of an increasing number of claims farmers encouraging bodily injury claims is spreading across Europe, and Poland is the latest country to be affected.

The UK motor insurance market is at the stage where insurers are making significant underwriting losses, partly due to the cost of third-party bodily injury claims. Deloitte this week predicted that UK motor insurers could lose £1bn in 2010.

Whittaker tells Insurance Times: “The Polish market is suffering a 'bit of a UK' at the moment. It’s a year behind. They’ve got their first claims farmers. You are seeing an increase in bodily injury claims in motor, and you don’t see that in many emerging markets.”

A interesting contrast

Whittaker says that in emerging markets there is little rating for motor, and bodily injury is a much smaller component of pricing compared with the UK, which has more than 40 rating factors.

He says: “In emerging markets, motor insurance is largely about car damage and car theft. The cost of life and the litigiousness around bodily injuries is so much less. That will change over time, but it is an interesting contrast.”

In the UK, motor insurance premiums for comprehensive cover have risen by up to 40%. Whittaker says combined operating ratios (CORs) in Poland have worsened in the last year to around 120% and he expects rates to rise. “The CORs on motor in Poland are poor. This is the first time Poland has seen that. Rates are going to have to go up significantly in the next couple of years.”

Escaping the crisis, for now

RSA operates as a direct player in Poland through its telephone and internet channels. Whittaker says this allows it to price with more sophistication and select better risks. Its COR is better than the average, he says, at closer to 100%. It has similar operations in Russia and the Czech Republic.

Whittaker predicts that the motor dilemma will hit most markets around the world. “It exists in a lot of developed markets. In emerging markets, while bodily injury and litigation isn’t the major issue, often they will have an ordinance of how much it will cost for an injury.”

Most emerging markets regions have escaped the crisis, for now. Whittaker says: “Over time you would expect bodily injuries to become a bigger component. Maybe depending on whether regulation allows it, you may get more claims farmers and more litigation. I think it is a natural trend. We see very little of it. The first time I’ve seen it in an emerging market is now.”

Whittaker says insurers can learn from the UK experience, and use tactics such as early settlement, and dealing with claims farmers and fraudulent bodily injury claims. “We’re already learning a lot,” admits Whittaker. “That will allow us to outperform.”

Appetite for expansion

RSA’s global emerging markets operation spans three regions: Latin America, Middle East & Asia, and central and eastern Europe. “It’s more where the sex and violence is really. It’s exciting, it’s different,” says Whittaker.

The company has operations in 21 countries with a target of writing £1bn of business by the end of the year. Its premium income currently accounts for only 10% to 11% of the group’s overall income, but it is hoped to increase this to 20% to 25%.

Earlier in the year, RSA was hit with a £30m net exposure as a result of the Chile earthquake. Its gross exposure before reinsurance was around £1.2bn. Whittaker says RSA, the largest insurer in Chile, still has an appetite for business in the region as rates are hardening, which will allow it to recoup some of its cash. “We don’t take too much exposure. We are still very happy in Chile.”

Scale and capability

RSA's emerging markets business is acquisitive: it bought Oman company Al Ahlia for £31m in February, to become the country's biggest insurer. Whittaker says the main focus now is adding scale to markets where the company is present, "but I wouldn’t deny that there are two or three markets that you would be crazy not to target if an opportunity came up”.

If RSA’s £5bn offer for Aviva had gone ahead, it would have widened the gulf between the emerging markets business and the rest of the group, but this wouldn't have discouraged his part of the business from growing.

“The fact that shareholders would give you the cash to do such a transaction is very encouraging,” he said. “Once you have got that kind of scale and capability, then actually investing in emerging markets is sometimes easier.

Making investments a little easier

"When you are the scale of business we are now, it can be quite difficult to imagine going to shareholders and saying I want to do a billion-pound transaction in Brazil. When you are twice as big, it does not seem much of an issue.

“Our genuine belief is once you get that bulk scale and shareholder commitment to spend the money, then making investments in a market that would seem a little bit more distant becomes a little easier.”