In the first of a series of articles aimed at demystifying Employers Liability insurance,
Jim Wilkes discusses the make-up of an Employers Liability premium
All Employers Liability
(EL) premiums will
factor in the
foIn the first of a series of articles aimed at demystifying Employers Liability insurance,
Jim Wilkes discusses the make-up of an Employers Liability premium
All Employers Liability
(EL) premiums will
factor in the
following:
Attritional claims cost
Large claim loading
Latency load - long tail claims
Expenses
Profit
The major problem for an EL
insurer is making a judgment
on an imponderable i.e. the
likely incidence and cost of
future claims
The attritional claims cost is
the insurers prediction of how
many claims (and their cost) the
particular policyholder is likely
to produce in the next twelve
months period of insurance.
The usual starting place is to look at the number of claims
produced in the last three or five years by that policyholder.
While getting a claims experience for five years seems to offer
more predictability than three years, there is also a greater
likelihood that the hazards presented by an individual
policyholder may have changed because of technological factors,
making the older historical experience potentially less useful for
predicting the future.
Moreover, at the smaller end of SME risks, the number of
claims suffered by an individual policyholder is usually very low
and not of any statistical predictive value. In such circumstances
insurers tend to look at their own historical experience of risks of
that or similar trades to help them make a prediction. Sometimes
policyholders consider that they would like a premium based
entirely on their own experience which sounds attractive
especially if their individual claims experience is minimal.
However, there is a downside to this. Significantly large claims,
say those that could cost in excess of £500,000 tend to occur
randomly and are not necessarily restricted to certain hazardous
activities. So, if you were attracted by the idea of an EL premium
calculated exclusively on your own experience, and you
experienced a claim of that magnitude your future premiums
would rise astronomically.
Insurers tend to smooth this out by factoring in the cost of
such large claims across their entire account so an individual
policyholder is not funding the entire cost in their own
experience. This leads to the second item in the cost make up;
that of the large claim loading. All risks will include a
contribution towards the Insurers experience of
large claims. Clearly the large claim load for a
hazardous activity like roofing would be larger
than that for an office based risk.
While most people are familiar with EL
insurers dealing with claims arising from
accidents, a significant portion of the claims
received by Insurers relate to diseases. Included
under this heading would be respiratory
diseases like asbestosis/mesothelioma, and also
noise induced hearing loss and vibration white
finger. Disease claims are immensely difficult to
predict, but what is certain is that they will
occur, sometimes in surprising workplace
activities, for example cleaners in entertainment
venues getting exposed to amplified sounds.
Disease claims are known as long latency
claims because the exposure can occur for
many years before the condition becomes
apparent at which stage a claim is likely to be
made. EL insurers load premiums for the
potential for disease claims (the latency load). This load will vary
with the trade activities involved.
Insurers also have to factor in all the usual costs which any
product supplier has. The insurers expenses are largely staff and
premises engaged either in the original underwriting of risks or
the handling of claims. Because most insurers re-insure
themselves, that cost would also be factored in. Finally, there is
the question of profit. In common with all major businesses
insurers are subject to market expectations in terms of profit. All
investments involve risk and as insurers very business is risk,
investors will usually be looking for a higher return than from
some other forms of business activity.
EL insurers are issuing policies that will indemnify for claims
that arise in the period of insurance but also for claims that arise
in the future from current exposures. EL insurers are currently
dealing with disease claims where the exposure may go back to
the 1960s, so setting premiums in the knowledge that claims may
not arise until many years into the future is fraught with
unknowns.
For this reason insurers have to monitor continually the
external economic and legal environments as one legal decision
can alter the risk environment dramatically.
Jim Wilkes is a Senior Casualty Underwriter at Zurich
Insurance.
(A future article will look at the impact of a policyholders risk
management regime has on an
insurers premium assessment.)
