The 2014 policy year has performed in line with expectations but the development on prior policy years has increased the combined ratio for the half year to 109%.
As reported in our 2014 Review of the Year, the 2013 policy year, after 12 months’ development, was already one of the most expensive years of the last decade. A small number of large injury claims notified in the six month period since the year end means that the 2013 year has continued to develop at a faster rate than other recent years.
Historically, development of notified claims slows considerably after 18 months when the final outcome of a year can be predicted with greater certainty. Having reached this maturity, development on the 2013 policy year should slow significantly but it is already set to be one of the most expensive years of the last two decades.Total notified claims on the 2012 policy year also developed more sharply over the last six months than anticipated, following deterioration in a small number of injury claims.
Total claims have eased in the first half of the 2014 policy year when compared to the2013 policy year at the same stage. The breakdown of notified claims by type, in figure2, shows the impact of casualty claims on the 2013 policy year. Although the cost of these claims has reduced in the 2014 policy year, their relative importance to the overall cost of the year continues to be significant. However, the total cost of cargo claims and the Club’s contribution to the Pool has fallen over the last two years.
Large Claims (>$0.5m)
The number and severity of large claims continues to have a significant impact on the overall cost of a policy year. In an average year, large claims represent over half of the retained cost of claims despite representing less than 1% by number. It is the impact of a small number of these large claims that brings volatility to the total claims cost.The elevated cost of the 2013 policy year is driven by large claims, in particular those over$2 million. The 2013 policy year has suffered 19 such claims compared to 10 in an average year. Although the number of claims has almost doubled there is no obvious trend.
Figure 3: Net notified large claims (>$0.5m) at 6 and 18 months by policy year.
A comparison of the experience of the 2013 policy year with that of the 2011 policy year highlights the volatility in large claims. The average annual cost of large claims to the Club over the last decade has been approximately $75 million. However, 2011 was $50 million below this level and 2013 is currently $50 million above. This implies a potential swing of$100 million depending on the number of large claims in any one year.
The Club has purchased reinsurance to mitigate the impact of large claims; however the considerable variation in the cost of these claims also demonstrates the need to hold sufficient capital to absorb the peak years without charging excessive premium to our Members.
Attritional Claims (<$0.5m)
Encouragingly, the frequency of claims per entered ton has fallen steadily over the last ten years, driven almost entirely by the number of claims below $0.5 million. The number of claims per ton in 2014 is half that experienced ten years ago. There is clearly a correlation between the drop in claims frequency and the downturn in the world economy.
Although claims frequency has fallen, the average cost of claims has inflated at a rate of 4% each year since 2005. In certain categories, the inflation has been much higher,as seen in the illness and injury categories which are around 12 %. The total cost of attritional claims has therefore remained broadly consistent over the last 5 years.
Figure 4: Net notified attritional claims (<$0.5m) at 6 and 18 months by policy year.