IAG’s UK claims cut margin

Insurance Australia Group (IAG) has blamed “a significant deterioration in UK claim experience,” for writing off $365m and warning its insurance margin will drop dramatically from 9.5%-11.0% to just 6.0%-7%.

An independent actuarial review of its UK business blamed bodily injury claims. The $365m mainly goes on claims reserves. There is also an approximate $60m net charge for a new reinsurance arrangement to limit exposure to further claims deterioration in the UK.

IAG will also write down goodwill and intangibles associated with the UK business of approximately $86m. But IAG was bullish about 2011 predicting FY11 insurance margin guidance of 10.5-12.5%.

Bodily injury claims

IAG Managing Director and CEO, Mr Michael Wilkins, said: “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.

UK remedial action

“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 programme of remedial actions.”

“Whilst this issue is isolated to our UK business and the market in which it operates, I’m extremely disappointed this has occurred and that it’s had an adverse 5% impact on our insurance margin for FY10. Encouragingly, all other businesses within the Group are performing at least to expectations.

“This is a challenging time for the UK motor insurance industry as a whole, however, we remain confident that Equity Red Star retains a strong niche position in UK motor classes and is capable of delivering attractive returns for IAG over the longer term.”

Neil Utley

CEO of IAG’s UK division, Neil Utley, said: “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.

“Based on the worsening claim payment experience in the opening months of calendar 2010, we’ve revisited the actuarial assumptions held at 31 December 2009.

“Of the strengthening identified today, roughly half relates to the 2008 and 2009 underwriting years which had previously not been subject to reserve strengthening. In addition, in accordance with the liability adequacy test (LAT), a $30m LAT failure has been recognised within today’s charge.”

UK changes

Utley said a range of actions are being undertaken to strengthen the UK business, including:

• Further rate increases of 10-20% across all classes of business
• Exiting certain unprofitable broker relationships
• Ceasing to write all external aggregator-sourced business of a non-bike nature
• Strengthening of underwriting and actuarial resources
• Revising and enhancing underwriting and claim practices

Wilkins said: “In addition, we have entered into a reinsurance arrangement which provides protection against a further $200m in claims deterioration.”

The reinsurance cover is in respect of underwriting years 2001 to 2009 inclusive, and is expected to result in a net cost to IAG of approximately $60m, all of which will be recognised in FY10.