Pre-recorded Lecture Materials
Insurance Types
Risk and Rating Factors - idea generator
Insurance Risk can Vary by Class
How do Claim Characteristics affect Risk
The General Insurance Environment
The General Insurance Market
Lloyd's History
1688 - Edward Lloyd ran a coffee shop in which merchants met with wealthy people to arrange insurance
1730s - Lloyd' begins to dominate shipping insurance
1734 - Lloyd's list appears
1750 - Underwriting first appears
1764 - Weak and leaky vessels
1768 - Lloyd's, the notorious gambling den
1769 - New Lloyd's appears
1773 - John Julius Angerstein developed the concept of the lead underwriter
1787 - First metal hulled boat (a barge) was built in Shropshire
1803-1815 - Napoleonic Wars
1775-1815 - American revolution and establishment of the Patriotic Fund
1799 - Loss of the Lutine
1817 - Invention of the Bicycle
1818 - First Steamship to cross the Atlantic (the Savannah)
1824 - Liberation of insurance industry so that more independent companies could write insurance.
1833 - Abolition of slavery in the UK
1851 - Financial security was made more rigorous
1858 - The Lutine Bell was salvaged
1863 - Invention of the Internal Combustion Engine
1865 - Abolition of slavery in the USA
1870 - Frederick Marten invented the concept of large syndicates
1871 - First Lloyd's act
1877 - Non-marine policies were introduced into Lloyd's
1880 - Cuthbert Heath wrote the first reinsurance policy
1890s - Lloyd's established itself in America with a new brand of entrepreneurial brokers
1905 - Risk based pricing
1902 - The Burnard failure, and the introduction of auditing
1903 - Wright Brother's first flight
1903 - Delegated authority introduced and Lloyd's was able to write insurance all around the World
1906 - San Francisco Earthquake and invention of Excess of Loss insurance
1908 - Audits become compulsory
1911- The Lloyd's Act
1912 - Titanic sank (loss of £1m)
1914-1918 Many Lloyd's staff fought in WWI and Lloyd's also made many contributions to war related charities
1923 - Harrison's folly and the creation of the central fund
1928 - Lloyd's moved into 12 Leadenhall Street
1930 - 3rd party insurance for driving vehicles on a road become compulsory
1939 - LLoyd's was effectively moved to Pinewood studios and staffed by 500 women to continue operations during world war II
1965 - Salto Grande and Itaipo Dams in South America
1973 - First female broker
1977 - The Council of Lloyd's was established
1983 - wearing of seat belts in the front seat became compulsory in the UK
1985 - Lloyd's started insuring nuclear power stations in China
1988 - Lloyd's Tercentenary Research Foundation set up
1980's and 1990's - Scandal Fraud and huge losses (Piper Alpha, Asbestos claims etc.)
1990 - The losses were worsened by the LMX spiral.
1992 - Hurricane Andrew (177,000 made homeless)
1993 - David Rowland appointed and this led to the setting up of Equitas to manage the related liabilities at a cost of £21bn
1993 - Bishopsgate bombing and establishment of Pool Re
1994 - Corporate members introduced (capacity £1,595m)
1998 - FSA introduced to regulate Lloyd's
2001 - September 11
2002 - Annual reporting introduced
2003 - Creation of realistic Disaster Scenarios
2005 - Hurricane Katrina - over 100 killed and tens of thousands left homeless
2007 - Contract certainty ended the markets 'deal now, detail later'
2010 - Deepwater Horizon
2012 - Vision 2025 launched
2020 - COVID 19 losses and first ever closure of Lloyd's building
More information can be found on many of these events on the Lloyd's website
Chain Ladder
How are they made
First we need to consider how policies written, accidents happening, being reported and claims being paid out are used to fill values into the various different run off triangles that we can use.
Once we have data in a triangle the mathematics of calculating the reserve is the same whatever the triangle represents
Notes
First we need to consider a timeline
A policy is sold (written in 2012)
The premium is then earned continuously over the next 12 months
An accident happens in 2013 during the term of the policy
In 2015 this accident is reported to the insurance company and the benefit is believed to be £450
In 2016 this claim is settled for £600
So where do these numbers go in the different triangles
First we consider IBNR by accident year
The bold line represent the current time at year end 2016
As the accident happened in 2013 and was reported in 2015 we can see this represents development year 3 for accident year 2013
What if we do an underwriting year triangle. Then we wish to consider when policies were written in respect of which accidents happen
This policy was written in 2012 so it is reported in development year 4
What about reported but not settled - this time we group accidents by the year in which they were reported
So this accident goes in reported year 2015 and is settled in development year 2
What about the paid triangle - this considers when claims were actually paid out
If this is grouped by accident year then this claim was paid in 2016 which is development year 4 for accident year 2013
But we can also do a paid triangle by underwriting year
This time the policy was written in 2012 for which the claim is finally paid out in 2016 that is year 5
Claims Inflation
Price inflation
Often quoted as prices of consumer goods
Readily available in many markets
Often not the most appropriate for insurance though
Wage inflation
Tends to be higher than price inflation
Will be a major part of many claims due to repair and rebuild costs
Also a major part of insurance company admin costs
Compensation
There is a tendency for liability and compensation payments to far exceed the rate of inflation as judges award bigger and bigger compensation payments
In the USA compensation can be awarded by a jury as well
No win no fee law firms can also cause an increase in the propensity of firms to want to make a claim
Demand surge
Prices for labour can be squeezed higher just when there are most claims for a multiple claim event due to supply and demand of labour
Medical expenses
Medical expenses tend to have their own higher rate of inflation and a specialist index should be used if possible
Accounting Timeline
Climate and Environmental Factors
It's more than just weather and climate
Reinsurance Methods
