Insurance industry issues: Uk and USA - Essay Example

Insurance industry issues UK and USA completed Introduction Many individuals face situations where economic loss may be unpredictable both as to amount and time. Risk-averse individuals and firms will be willing to pay a premium to transfer the risk of loss to insurers thus protecting their resources. There are two main classes of insurance business in the United Kingdom and United States: long-term insurance and general insurance. Though, in this report we will discuss issues which are currently of importance to the UK insurance industry and make a comparison between the situations facing insurance in the UK with that facing the insurance market of USA. Motor Insurance Driving is an activity which everyone, or almost everyone, practices successfully; it is generally felt to be an easy task, an everyday activity at which everyone is almost perfect and whose risks are therefore underestimated. Accordingly, a failure in this apparently easy task is particularly wounding to self-esteem. Consequently, defense mechanisms are more frequently encountered here than in other areas of life. A survey conducted by Mori for the British School of Motoring in 2002 showed that 25 per cent of drivers thought they had no bad driving habits and that 90 per cent rated their driving as fairly good to excellent. The reality is different. In any one year in the United Kingdom, one in five of drivers comprehensively insured and 65 per cent of all fleet cars will have an accident. In any one year among children less than 15 years of age one child in fifteen will be killed or injured by road vehicles and their drivers. The cost of road accidents in the United Kingdom is estimated to be in the region of £12 billion a year. Not many insurers make a profit on their motoring account and one reason is that it is hard to persuade the insured that the risk is high and that premiums have to rise accordingly. Customers are becoming increasingly loyal to their motor insurers as the market starts to soften. MORI data shows that in 1999, 27.8 per cent of customers changed their motor insurance provider at the last renewal stage, compared to just 20.6 per cent in 2003. Loyalty and retention rates also improve with the age of the customer. The top ten players controlled 63.8 per cent of the market in 2002, an increase of 1.5 per cent on 2001. This growth has come at the expense of the market share of the smaller players within the market. These smaller insurers saw their combined market share fall by almost 5 per cent between 2001 and 2002. http://www.datamonitor.com/~aab4e563736641bb81b1298c33171fc4~/industries/research/?pid=DMFS1609&type=Report The UK government has, ‘no win, no fee’ arrangements and the major issue which UK insurance facing these days is, full payment for personal injury which in result affecting consumer who have to pay high premiums. “The law of unintended consequences is one we know well. Here at home, in January 2003, the Department of Health started to charge motor insurers for the full costs of NHS treatment for accident victims. While the industry accepts that society must decide how best to distribute the costs of compensating accident victims, we have a duty to make clear, as in this case, the consequences for our customers, who will face higher premiums” Association of British Insurers(ABI,www.abi.org.uk)-Annual report2002-2003 In US, no-fault is an insurance system that has much in common with traditional tort insurance. Indeed, the principal motivation for exercising care—avoiding injury to oneself and civil or criminal penalties for traffic violations—is unaffected by no-fault insurance. The marginal change in liability under no-fault can at best affects only a minor portion of the overall incentive to drive carefully. Moreover, as many researchers have noted, no-fault, as currently implemented in the United States at least, is far from pure. Tort thresholds in most states shield only a fraction of all accidents from the tort system. Potential damages to the at-fault driver include property damage, bodily injury, wage loss, and non-economic damages. In both tort and no-fault states, personal collision insurance compensates at-fault drivers for their own property damages, and under neither system are the at-fault drivers own non-economic damages eligible for compensation. Consequently, no-fault does not differentially affect incentives through its treatment of the at fault drivers property and non-economic damages. In terms of bodily injury and wage loss, it is conceivable that no-fault creates an additional moral hazard not present in tort states for those drivers who elected not to carry insurance for economic damages they sustain in accidents in which they are at fault. Under tort, first-party bodily injury insurance is not compulsory. Under no-fault, however, all drivers must carry PIP insurance that compensates them for economic damages regardless of fault. Thus, compulsory first-party bodily injury insurance under no-fault may induce this marginal driver to drive less carefully because his or her own bodily injury and wage loss will now be compensated whereas under tort they would not be. How important this effect could be is difficult to determine because there is no direct figure on how many drivers in tort states do not insure themselves for their own injuries. Nor is it known how many drivers who did not have coverage for their own injuries in tort states would continue to drive uninsured in no-fault states. Nonetheless, it seems unlikely that this moral hazard alone could affect the incentives of many drivers. Fraud prevention Insurers believe, no doubt correctly, that they are paying out more than they have to. This belief has been encouraged by loss adjusters, who talk to them of leakage, including above all fraud, and of the need to audit leakage -- with the help of adjusters. Fraud, they say, is a national sport, in which insurers are fair game. The fear of fraud and other leakage is also fanned by the promoters of conferences, attendance at which will, said one, help you minimize your claims exposure by using law effectively because, it is estimated that 35 per cent of claims received are invalid, either in whole or in part. Agreement is found in the industry that most fraud occurs under travel, motor, household, commercial contents and fire insurance. For example, 10-15 per cent of travel claims are believed by insurers to be fraudulent, at an estimated cost to insurers of £50 million a year. Research at Leicester University, published in 1994, indicated that at least 10 per cent of home-insurance claims could be described as fraudulent, whereas a survey by the Association of British Insurers (ABI) put them at 5.7 per cent of claims by number. As for fire, damage to property in the United Kingdom amounts to about £1.5 billion a year. The Arson Prevention Bureau has estimated that around 50 per cent of the cost of fire claims is due to arson; but that, of those actually convicted of arson, only about 6 per cent are fire insurance claimants. The main motive for arson is not fraud but revenge, and more than one third of the cases were accounted for by mental illness, drugs, or alcohol. As for other lines, at the end of 2003, the ABI published the largest ever survey of insurance fraud, which showed that the percentage of claims reckoned to be fraudulent was 7 per cent overall; and that fraud added on average nearly 4 per cent to the cost of insurance. In case of US, that is fairly representative in this respect, provides that the Superintendent “issue" a license to a domestic, foreign, or alien insurer to do the kinds of insurance business for which it is qualified under the provisions of state law and under its charter. Under most licensing statutes, licenses may be revoked by the regulator for such predictable reasons as fraud, dishonesty, incompetence, untrustworthiness, or certain specific violations of the insurance laws. Revocation of a persons or entitys license may disqualify the former licensee from being employed by, or in any way affiliated with, another licensee in the future, except perhaps in a clerical or ministerial capacity. Agents who are administratively appointed by particular insurers normally cease to be licensed as to any insurer if that insurer files a termination of the appointment. An explanation of the reasons for termination may be required and in appropriate cases may result in an administrative or criminal investigation. Uninsured Driving In UK uninsured driving is also one of the major issues. The English rule puts the cost of acquiring information for the insurer about the risk on the proposer that causing higher premium. Just as careful (and lucky) drivers help to pay for the losses suffered by careless (and unlucky) drivers, they also pay for the extra risk posed by a proposer who, in response to a question about convictions during the previous five years, overlooked that a conviction for speeding five years ago was just inside that period. This is unlikely to lead to adverse selection and unravelling; most insured drivers surely are risk-averse and would prefer to pay a little more to cover careless contracting by the pool than find themselves uninsured. In US, A few states, including New York, also have statutes that establish a fund to which licensed insurers must contribute, for the purpose of paying claims against uninsured, underinsured, or unidentified ("hit-and-run") motorists. The New York fund, called the Motor Vehicle Accident Indemnification Corporation, will pay up to the New York minimum limits of liability insurance, less any insurance or assets of the "financially irresponsible motorist" which are recoverable. In other states, uninsured motorist coverage (under which the injured persons own insurer pays on the basis of the uninsured motorists fault) may be mandatory, or insurers may be required to offer it as an option. Liability Insurance “Insurance designed to cover the liability that might devolve upon an employer if an employee is injured in the course of his/her employment” (http://www.oft.gov.uk 2003) Unlike public and product liability, employer’s liability insurance may be affected as a stand-alone policy and is compulsory by law. The Employers Liability (Compulsory Insurance) Act 1969, seeks to insure in the event of any employee suffering injury or disease due to the fault of the employer, there will be funds available to meet the employees claim (M. Davis 1997). In addition to the Act of 1969 are The Employers Liability (compulsory insurance) General Regulations 1971. Insurers are prohibited from including conditions within their policies that concern: Conditions precedent to liability Reasonable precautions Compliance with legislation/regulations Record keeping (M. Davis 1997) Although it is compulsory for the majority of employers to possess employer’s liability insurance, it is not uncommon for smaller firms to go without in an attempt to be more cost effective. Existing concerns and trends facing the market At present the UK Liability insurance market is passing through a turbulent time. Although companies operating in the market are relatively stable, and those seeking insurance can easily obtain cover, experts may have cause for concern. As a result of concerns from both the insurers, and industry and commerce, the Office of Fair Trading (OFT) commissioned a report in June 2003 examining the current liability market. In their results, the cost of cover was highlighted as a major cause for concern. Recent high profile events such as 9/11 and increased asbestos claims have caused premiums to rise. OFT estimated that in the year June 2002-June 2003 the following increases occurred: 50% increases in employers liability cover 30-40% increase in public and product liability cover Some specialist premiums increasing by over 200% (http://www.oft.gov.uk 2003) Even with these significant premium increases the vast majority of firms operating in the UK are in a position to obtain. However, it was apparent that small to medium sized firms were having problems. In a bid to remain competitive and cut costs, some organizations were operating without legally required insurance. This fact was first identified in a 2002 study by AXA; in their report 700 firms were surveyed. It was discovered that 13% were operating without any form of liability cover (www.dbriskwaters.com 2004). Firms operating without liability insurance present a real dilemma for a number of different stakeholders including employees, the insurance industry and the government. Future concerns for the liability market Within the liability market, asbestosis and asbestos related diseases is a major concern. Mesothelioma (cancer caused by asbestos) is on the increase and many medical practitioners and researchers fear the UK is on the verge of an epidemic. At present the cancer results in the death of approximately 1800 people each year in the UK. However, due to the long incubation period (25-50 years) many feel these numbers will not peak until the years 2015-2020. Until 1983 (when restrictions on the use of asbestos were implemented) asbestos was used widely. Many within the insurance industry are now concerned that claims against employers’ liability policies may be considerable (http://www.bbc.co.uk, 2004). To envisage the scale of the problem we only have to look to the USA. Leading economists have estimated that the economic damage of asbestos related diseases could reach $200 billion. Of this figure it is expected that the insurance industry will have to pick up $120 billion (http://www.globalre.co.uk, 2004). Although the amounts in the UK will not be in this range, asbestos claims may arise in the future and have those in the liability market seriously concerned. Other problems which concern the UK market include illness caused by mould, and lead poisoning caused by working with or exposure to lead based paints. http://www.riskmanagement.com.au/News/LiabilityInsurancePoliciesandtheCurrent/tabid/115/Default.aspx In US, presently Liability Insurance concern, extension of statutory environmental liabilities, market demand for insurance subsequent to costly pollution risks has exaggerated. Stipulatation for pollution liability insurance in the United States became more imperative. Pollution liabilities are included within general public liability policies. These policies intended to offer insurance against a persons prospective legal liability to a intermediary; the main issue is that it did not cover intentional acts or omissions. Pollution that is not deliberate or anticipated is classified as "accidental," for which there are two sorts in insurance policy--impulsive and unintended pollution, and gradual pollution where there is delay concerning the polluting acts and the expression of damage. Further, damage to the insureds property, such as cleaning of a infected site, is barred and should be the subject of a separate policy. Terrorism Issue facing Insurance Industry September 11 constituted a watershed event for the insurance industry. Prior to September 11, the most costly insurance event in world and national history was Hurricane Andrew, which resulted in losses totaling $19.6 billion in August 1992. This loss stands to be dwarfed by the financial impact of the events of September 11, estimates of which have varied from $30 billion to $90 billion. If the $90 billion estimate proves to be accurate, such a loss would exceed all of the combined insurance losses in the United States for the period 1993 through 2000. Even assuming the accuracy of the more modest estimate of $60 billion, such a loss would exceed the entire property and casualty industrys combined net income for 1999 through 2001. These estimates include $1 billion in costs associated with demolition and debris removal at the former site of the World Trade Center in New York as well as an estimated cost of rebuilding in excess of $8 billion. These estimates are 120 to 180 times the $500 million cost of the previous bombing of the World Trade Center in 1993 (Lucien J. Dhooge, 2003). There are numerous types of insurance impacted by the September 11 attacks. For example, commercial property insurance policies cover direct losses to insured property, such as damage to buildings and their contents. These policies may contain an endorsement insuring indirect losses, "such as the interruption of a businesss income stream following the loss of its premises." Equally impacted may be inland marine insurance policies that provide coverage for special types of personal property, such as computers and construction equipment. Commercial property and inland marine policies may apply on an "all-risk" basis, providing coverage for any cause of loss not specifically excluded, or on a "named-peril" basis, only providing coverage for causes of loss listed in the policy. Business income insurance provides coverage for income losses suffered as a result of destruction or damage to the insureds place of business. In a similar vein, business income civil authority coverage protects businesses that suffer income losses as a result of the denial of access to their premises by civil authorities. Income losses suffered by businesses as a result of their dependence on a business whose premises have been destroyed or damaged may be covered by contingent business income coverage. Other impacted policies include those relating to general liability insurance, life insurance, workers compensation, health and disability insurance, homeowners and renters insurance and automobile insurance (Lucien J. Dhooge, 2003). Among U.S. insurance companies, the greatest losses occurred in the reinsurance industry. Berkshire Hathaway and St. Paul Companies suffered $2.2 billion in losses each while CNA Financial Corporation suffered losses totaling $304 million. Commercial property, casualty and liability companies also posted large losses. For example, American International Group of New York suffered a pretax loss of $820 million as a result of the attacks while Citigroup, Inc. incurred a $502 million loss. Other commercial property, casualty and liability companies incurring significant losses included Hartford Financial Services Group, Inc. ($440 million), Chubb Corporation ($240 million) and Allstate Corporation ($32 million). U.S. life insurance companies were impacted by the September 11 attacks to a lesser degree. Nevertheless, major life insurance companies incurred significant losses, as exemplified by the $210 million, $100 million and $25 million losses suffered by MetLife, Inc., New York Life Insurance Company and Cigna Corporation respectively (Lucien J. Dhooge, 2003). Prior to their acquisition of the leases, the Lessees retained Willis Limited (Willis) to obtain insurance coverage on their behalf for the World Trade Center complex. There is considerable controversy with respect to the circumstances surrounding the Lessees efforts to obtain insurance (Lucien J. Dhooge, 2003). UK is also facing this issue these days though the events of September 11 brought the issue of insurance coverage with respect to the World Trade Center complex into sharp focus. In UK, Between August 2002 and January 2003, the new arrangements for dealing with the reinsurance of terrorism risks via Pool Re, the government-backed reinsurance pool, came into effect. Though it is quite difficult to offer a wider range of services to customers. Over time, it is intended that the reinsurance market for these risks will become fully commercial Life insurance In UK there is range of insurance products on sale is short and should be consider. United States has a tort system that is a direct patient-compensation system that also protects physicians from liability (without jury trials and without lawyers contingency fees), and is not used to the same degree as in the United States, it represents the same general approach. And it is now getting greater use than ever before. As in the United States, Britain has no general systematic compensation system for patients suffering medical injuries, whether the result of malpractice or maloccurrence. Basically, the lines of insurance available depend on demand and, thus, largely on perceptions of risk and need. Today life insurance is seen not only as a means of family provision but also, a related matter, as an investment. In England, life insurance, together with fire and marine insurance, was the first on offer. Most of the other established classes of cover offered by insurance companies were introduced between 1840 and 1900 (Christine Bradley, 2000). More recent developments include contractors all-risks insurance. As building and engineering projects have got larger, so has awareness of the need to cover work under construction, work in which much time and money has been invested. Customized insurance cover of great complexity is arranged for new airports, tunnels under the sea, and so on. Another recent development of a more personal kind concerns people whose continued prosperity depends on all or part of the anatomy -- their own or that of those they employ. To a football club, a star player is an asset to be insured not only against the slings and arrows of outrageous spectators but also the attentions of opposing players -- usually for the amount of the players potential value in the transfer market. The idea, said the Financial Times’ that Pat van den Hauwe, Spurs redoubtable left back, is an intangible asset may be news to some opposing forwards. But for many businesses the most valuable resource is people. Almost anything and anyone can be insured, if the insurer can assess and quantify the risk. However, although a famous actress associated in the public eye with her bosom insured her bosom, and a popular comedian with prominent front teeth insured his teeth, a high priest of haute cuisine was unable to insure his sense of taste: the insurer did not dispute its importance or value but could not see how he would be able to assess a claim. A further and final instance of the new products of our time is this: those who do not die quickly on the roads but die slowly in their beds can buy dread disease cover to ease the financial burden and thus the discomfort of their decline. Thus, the range of insurance products on sale is considerable. Conclusion This report discusses issues facing USA and UK insurance industry. Both countries suggest the weakness of a professional self regulatory approach, both from the publics and from the professions point of view. The public wants more rigorous pursuit of the negligent doctors; the profession is under attack from not providing that and the courts are on their way to playing the same role they do in the United States. The American tort system, weak state boards, and the medical profession are also under attack. Both countries could benefit from a close examination of their current approach which. Moreover, it is clear insurance firms must make profits and cover any claims. Increasing premiums by massive amounts will only serve to dive customers away or cause resentment towards insurance providers. It has already become obvious that many smaller organizations cannot afford liability insurance; this has resulted in firms operating illegally, without the statutory insurance. Those operating in the liability market may wish to consider offering specialist liability insurance for smaller firms. http://www.riskmanagement.com.au/News/LiabilityInsurancePoliciesandtheCurrent/tabid/115/Default.aspx In general the upward trend in claims in most classes of insurance business, whether social, technological or legislative in origin, poses interesting questions for underwriters of risks. Insurance companies may have to become more involved with risk-prevention or make greater efforts to control the cost of claims. General Accident and Guardian Royal Exchange, for example, are involved directly in the car repair business. Responsibilities of insurers to provide continuing insurance protection to policyholders at reasonable or acceptable cost could conflict with the interests of shareholders, managers and employees, who may be better served by the elimination of underwriting losses. Large rises in premiums and more selective underwriting, however, may lead to an increase in the amount of risk carried without insurance cover where potential policyholders are unable or unwilling to purchase insurance. Moreover, the events of September 11 were also a wake up call for the government. There is a strong case for limited federal intervention in the commercial property and casualty insurance industries. The U.S. government has now realized that which has been long known to other governments, most notably the British government, specifically, that the health of a significant portion of the economy relies upon the ability of private industry to procure and maintain affordable insurance. Any inability to obtain and retain such insurance in the wake of September 11 will not only seriously hinder the ability of the economy to rebound from its current doldrums but will also hamstring future growth. The anecdotal nature of this inability is of no consequence. Despite considerable delay, the federal government has acted through the Terrorism Risk Insurance Act, the effectiveness of which remains to be determined (Lucien J. Dhooge, 2003). Nonetheless, the federal government must resist two temptations in future attempts to address issues arising from September 11. Initially, it must avoid trying to do too much in a hasty manner. The natural inclination of government under such circumstances is to overreact in an impulsive fashion. This has already occurred with respect to the overreaching nature and intrusiveness of the USA PATRIOT Act. Traces of this same inclination are evident in aspects of the Terrorism Risk Insurance Act. Such overreaction must not be permitted to occur at the undue expense of taxpayers with respect to any future plan to assist the insurance industry (Lucien J. Dhooge, 2003). Ultimately, with an even-handed approach by the federal government, cooperation between competing trade and consumer interests and adaptation to the changed circumstances by the industry itself, insurance companies can emerge from the nightmare of the September 11 attacks risk savvy and financially stronger. All parties will be severely tested, but the stakes could not be higher and ultimate success is absolutely essential (Lucien J. Dhooge, 2003). Work Cited Association of British Insurers(ABI,www.abi.org.uk)-Annual report2002-2003 http://www.riskmanagement.com.au/News/LiabilityInsurancePoliciesandtheCurrent/tabid/115/Default.aspx http://www.allianzglobalinvestors.com/Az_Cnt/az/_any/cma/contents/326000/saObj_326961_2003_Annual_Report_Allianz_Group.pdf http://www.datamonitor.com/~aab4e563736641bb81b1298c33171fc4~/industries/research/?pid=DMFS1609&type=Report http://www.law.duke.edu/journals/delpf/articles/delpf12p293.htm Lucien J. 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