Circular 16/05: Review of Open Policy Years
2006 Policy Year General Increase
- 12.5 per cent general increase ordered for 2006 policy year
Volatility in investment return in recent years
Supplementary premium estimates maintained at nil for all open policy years
Record level of claims on 2004 policy year and continuing volatility in claims pattern
TO THE MEMBERS
REVIEW OF OPEN POLICY YEARS
2006 POLICY YEAR GENERAL INCREASE
At their meeting on 17th October the Directors reviewed the development of the Club's funds and claims.
This time last year the Board drew attention to the increased volatility in both the investment return and the claims pattern. At that stage the development of the 2004 policy year was very immature but there were early signs, even six months into the year's development, that it would be another heavy year for claims. By the end of the Club financial year on 20th February 2005, it had become clear that the claims on the 2004 policy year were running at near record levels and were probably higher than those on the 2002 policy year. The latest figures which were considered by the Board on 17th October have confirmed this position.
The extent of the volatility in the claims pattern can be seen clearly from the table below, which shows the currently projected claims outcome for the policy years 2001 - 2004. These figures represent the incurred claims and the expenses incurred in defending them together with an actuarial element for the projected final outcome of the year, usually known as IBNR (incurred but not reported) claims.
The 2003 policy year was remarkable in that the Club had only one notified Pool claim. The 2004 policy year by contrast was one of the worst years on record and was notable for the large number of high value Pool claims. Indeed notified claims on the Pool by all clubs in the International Group are running at record levels for that year.
It is not possible after only six months to predict the final outcome of the 2005 policy year but the early signs make it very unlikely that the benign experience of 2003 will be repeated even if the year's ultimate claims experience turns out to be significantly better than that of 2004. A slight improvement on 2004 is the current expectation, albeit one that could easily change with the impact of actual claims over the next six months.
It is now quite clear that the premium levels of 2004 were insufficient to cover the actual claims experience incurred in that year. Even after the increase imposed in 2005, premiums are still lower than the level needed to cover the claims levels which can reasonably be expected in 2006, not least in the light of recent inflationary pressures on claims, for example from commodity price increases.
As a mutual, the Club of course benefits directly from investment income. However, the volatility of the investment return over recent years and the expectation of modest average returns in the future (currently estimated for planning purposes at a five year average of 5 per cent) mean that it is unsafe to rely on a regular annual return to support a planned underwriting deficit.
Reinsurance, particularly the contract with Swiss Re, will assist in protecting the Club from the impact of exceptionally adverse claims experience in a single policy year. However it has never been the Board's policy to rely on this reinsurance as a means of subsidising in advance a planned operating deficit on the forthcoming policy year.
In these circumstances, the Board has concluded that a further increase in premium levels is required and have accordingly ordered a general increase for the 2006 policy year at 12.5 per cent of Member's premium ratings plus any relevant increase in the cost of the International Group Reinsurance programme for 2006.
The Board recognizes that this may be unwelcome news in the short term but the raising of the overall premium levels is important to ensure that the Association is better positioned to meet an increasingly volatile claims environment and to avoid the erosion of its current level of free reserves.
Mutual premiums for 2006 will be payable in four instalments, three during the policy year by 20th March, 1st June and 1st September, and the fourth by 1st December in the following year (2007). The estimate of supplementary premium is nil.
THOMAS MILLER (BERMUDA) LTD.