Circular 18/04: Review of Open Policy Years & 2005 Policy Year General Increase
- Increasing volatility evident in both investment income and claims performance in recent years.
- Changes in the regulatory environment will require insurers including clubs to raise their minimum capital levels.
- Supplementary premium estimates maintained at nil for all open policy years.
- 12.5 per cent general premium increase ordered for 2005 policy year.
- No immediate action required by Members; this circular is for information only.
TO THE MEMBERS
REVIEW OF OPEN POLICY YEARS
2005 POLICY YEAR GENERAL INCREASE
At their meeting held on 25th October the Directors reviewed the development of the Association’s funds and claims.
The Association’s reserve strength, combined with the protection of the Swiss Re reinsurance contract, means that all the supplementary premium estimates for all the open policy years (i.e., the 2002, 2003 and 2004 policy years) are maintained at nil.
The development of the 2002 and 2003 policy years has improved over the past six months, but the pattern of claims levels in the open years is notable for its volatility. The years prior to 2002 were relatively stable from one year to the next, but 2002 showed a sharp increase in the cost of claims. 2003, by contrast, has performed more in line with the historic trend. Now the current policy year, 2004, is showing early signs of being another year of heavy claims.
This volatility in the development of the claims in the open policy years has been matched by similar volatility in the investment return. The return on 2003 was a strong 18 per cent, whereas 2004 is currently forecast to produce a return of 2 per cent.
A further important factor is the fast-changing regulatory climate, borne out by two new regulatory capital measures which will come into force in 2005 in the UK – the Enhanced Capital Requirement (ECR) and the Individual Capital Assessment (ICA). These measures, based on more conventionally capitalised insurers, will require all insurers including clubs regulated by the FSA to raise their minimum capital levels.
It is against this picture of increased regulatory requirements, coupled with the volatile claims and investment development, that has caused the Board to order a general increase of 12.5 per cent in Members’ premium ratings for the 2005 policy year, plus any relevant increase in the cost of the International Group’s reinsurance arrangements for 2005.
The Board recognises that the increase will be unwelcome news, but believes that it is in the best interests of the Association and its Members to take the steps necessary to maintain the Association’s financial strength.
Mutual premiums for 2005 will be payable in four equal instalments, three during the policy year by 20th March, 1st June and 1st September, and the fourth by 1st December in the following year (2006). The estimate of supplementary premium is nil.
THOMAS MILLER (BERMUDA) LTD.
- Members are recommended to contact their usual underwriter if they require further information on the general increase and development of the open policy years.