Markerstudy’s reserves below best estimates as legal battle continues

Markerstudy Insurance Company Limited set its reserves below actuarial best estimates for the second year running in 2009, despite an £11m boost to prior-year provisions.

However, the Gibraltar-based motor insurer said it was able to do so in part because it expects to recover at least £6m from Endsleigh, which handled Markerstudy’s claims until 1 July 2008. The company has taken legal action against Endsleigh for alleged breach of contract. Markerstudy disputes the validity of the claims that were paid out on Endsleigh’s watch.

Markerstudy is treating the dispute as a subrogation claim and has recorded a minimum expected recovery of £6m as an asset on its 2009 balance sheet. However, Insurance Times understands Markerstudy Group is expecting to recover in excess of £10m plus costs and interest.

Markerstudy’s 2009 accounts reveal that its gross reserved provision was £4.7m lower than its actuary’s best estimates. Gross provisions for outstanding claims were up £11.7m to £46.1m in 2009 from £34.4m in 2008. The company said in its business review that claims farming and the increasing frequency of bodily injury claims had prompted it to strengthen prior-year reserves by around £11m.

As previously revealed by Insurance Times, Markerstudy’s 2008 reserves fell £4.25m short of previous actuary EMB’s best estimates.

Markerstudy says its reserving levels were within the actuaries’ acceptable range in both years.

In addition, the company said that the actuarial best estimate is derived mainly from historic settlement and case reserve data, and therefore includes the claims which Markerstudy questions the validity of.

Markerstudy also believes it has taken actions which will improve results, including increasing rates, improving risk selection and employing counter-fraud claims handling processes.

“The directors believe that these factors affect the actuary’s best estimate and range to an extent that the actuary was not able to take into account particularly when estimating the 2009 underwriting year,” the company said in its 2009 results filing.

Markerstudy’s auditor, Baker Tilly (Gibraltar), suggested in the filing that the company’s financial situation could be precarious if it did not recover the £6m from Endsleigh. “Any negative variance in the level of claim reserves and/or the recovery on the subrogation claim could affect the company’s ability to meet its required solvency margin and could therefore affect the company’s ability to continue as a going concern,” the company said.

However, Markerstudy group chief executive Kevin Spencer told Insurance Times that his company will “almost certainly” receive the minimum of £6m it is expecting. He said the company has already had two preliminary hearings, and was awarded costs and obtained judgment in both.

Group underwriting director Gary Humphries added that Markerstudy’s finances would still be sound if it lost the case. “Even if we didn’t win, the shareholders would input the funds to replace the expected recovery,” he said.

Markerstudy’s reserve strengthening pushed the company into a technical loss of £1.8m in 2009, compared with a technical profit of £2.4m in 2008. After adding in realised and unrealised investment losses and other charges, the company made a net loss of £4.5m, compared with a net profit of £764,574 in 2008.

However, 2010’s technical result is “much improved”, according to Humphries. He also noted that, while there was further reserve strengthening for the prior years that were still subject to claims farming activity, he said the hike was “nothing like as significant as previous years. We took most of the pain [in 2009]”.

He also said the current-year reserving number for 2010 was in line with actuarial best estimates. “It’s only on the prior years that this disparity exists.”

Endsleigh declined to comment but is defending the case.