Claims Experience – What does this mean for every policyholder and the insurance industry as a whole?

Policy anniversaries and reviews are part of our regular routine as short-term insurance personnel. One of the biggest issues always discussed is loss ratios per individual policy based on its performance. Sometimes clients feel unfairly treated by insurers when premiums are loaded on the policy or on sections of the policy to take into account claims from the previous period. It is also for this reason why insurers ask for previous claims history when receiving a policy as they intend to do more accurate underwriting and accurately price.

The following are some important points to note about how claims experience operates and what it means for both insurers and policy holders:

1.  Claims Experience – What is the significance of this?

The “claims experience” of an insurance portfolio forms a significant and integral element of negotiations between an insurer and the policyholder. It is always taken into account enabling insurers to accurately assess their risks and the policyholders’ in order to budget for the costs involved for insurance purposes.

2.  Loss Ratio – What does this mean?

The claim experience of an insurance portfolio is expressed in terms of the “loss ratio’. It is the ratio between the claims paid during a particular period against the gross premium received during the same period. A 60% loss ratio is generally regarded by an insurer as a break-even point as they have to make provision for commission and fees paid to brokers and also reinsurance and general administration costs and ultimately have a margin for profit.

3.  Professional Re-insurers – What is their function?

These are large international companies who dictate the terms and conditions that local insurers can underwrite each risk with. Their terms and conditions are largely dependent on the insurer’s loss ratios. This has the effect of spreading the risks globally and protecting the financial integrity of the local insurers.

4.  Risk Awareness – How should we approach this?

There are basically 3 ways to deal with “risk”

  • Eliminate risk by sensible and cost-effective risk management and loss control. It is not always possible to totally eliminate risk but good controls keep the risk at a minimal.
  • Absorb risk by strategic excess structuring and funding 
  • Transfer risk by transferring only those risks to an insurer which, if they occur, would have an unacceptable impact on your financial resources

5.  Policy cancellation – How does this affect your future insurability?

Every effort should be made to avoid having your policy cancelled by insurers as there is an enduring onus to disclose the reasons for cancellation to alternative insurers, as full disclosure of the claims experience and loss ratios must be made

6.  What if your claims experience is ‘good’?

This is an argument that a lot of clients always have with insurers almost on an annual basis with the view that there is a correlation between a bad loss ratio and an increase in the premium. On an annual basis the consumer price index goes up, and so do inflation and various other services. This has the effect of increasing the prices across all industries and this in turn affects the service providers that insurance companies use, e.g. cost of parts for motor vehicles, replacement of contents, etc.

The annual increase in premium across the board, like in most services, is done to ensure that insurance companies can cover claims costs as well as other costs mentioned earlier in a sustainable manner for the benefit of everyone in the insurance chain.

Speak to your Garrun broker if you have any further questions about your Insurance cover.