Insurance Australia Group Strengthens UK Claim Reserves

June 2, 2010

Insurance Australia Group (IAG) has announced that “due to a significant deterioration in UK claim experience, in particular bodily injury claims, it had conducted a further independent actuarial review of its UK business.

“As a result, in FY10 the Group expects to recognize an associated one-off, pre-tax charge of approximately A$365 million [US$ 304 million] and to report a full year insurance margin of 6.0-7.0 percent, down from previous guidance of 9.5-11.0 percent.”

For FY 2011 IAG said projects an “insurance margin guidance of 10.5-12.5 percent reflecting confidence in the continued underlying improvement in its overall business.”

IAG described the anticipated A$365 million charge in FY10 as “mainly relating to claim reserve strengthening. It includes an approximate A$60 million [US$50 million] net charge associated with a new reinsurance arrangement to limit exposure to further claims deterioration in the UK.”

In addition, the Group said it expects “to recognize a write-down of goodwill and intangibles associated with the UK business of approximately A$86 million [US$71.6 million].”

IAG Managing Director and CEO, Michael Wilkins, said that the Group had previously highlighted an increase in the cost of bodily injury claims relating to the 2007 and prior underwriting years; however, the latest actuarial review has confirmed the scope of the issue is greater than originally anticipated.

“As we’ve flagged for the past 12 months, the increase in bodily injury claims is a problem confronting the entire UK motor insurance industry. In light of this and a significant deterioration in claim payments in the opening months of calendar 2010, a further review of our UK claim reserves was undertaken.

“This has revealed that a significant revision to our reserves is required. The deterioration now extends to underwriting years since 2007 and impacts most classes of motor business.

“Our immediate priorities have been to ensure our UK business is appropriately reserved, our exposure to this issue is limited through reinsurance, and that we have an appropriate program of remedial actions,” he explained.

Neil Utley, CEO of IAG’s UK division, noted: “The UK insurance industry has seen a significant increase in the cost of bodily injury claims. This includes a notable rise in the number of injured parties per accident, primarily driven by the ‘claim farming’ activities of accident lawyers. Recent industry reports indicate significant claims inflation in this area driven by increases in both frequency and severity. Economically-inspired claim activity is also growing in a tough environment.”

Source: Insurance Australia Group

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