IAG injects £206m into Equity Red Star

Insurance Australia Group (IAG) has pumped an extra £206m into UK subsidiary Equity Red Star to cope with a surge in bodily injury claims.

IAG UK chief executive Neil Utley blamed the reserves injection on the “claims farming” activities of accident lawyers, about half of which relate to 2008 and 2009.

He said Equity had taken a range of actions to strengthen the business, including increasing rates by between 10% and 20%, exiting unprofitable broker relations and revising underwriting and claims practices.

“The UK insurance industry has seen a significant increase in the cost of bodily injury claims,” he said. “This includes a notable rise in the number of injured parties per accident, primarily driven by the claims farming activities of accident lawyers.

“Recent industry reports indicate significant claims inflation in this area driven by increases in both frequency and severity.” He said claims activity had also grown as a result of the tough economic environment.

“Based on the worsening claims 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.”

IAG said its insurance margin – the ratio of insurance profit to net earned premium – will drop dramatically from an estimated 9.5%-11% to just 6%-7% this year.

IAG will also write down goodwill and intangibles associated with the UK business, amounting to around £48.8m.

But IAG was bullish about 2011, predicting an insurance margin of 10.5%-12.5%.

IAG chief executive Michael Wilkins said: “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.”