Page 50 - Insurance Times December 2020

smaller companies rely on advisory organizations or actuarial 1. Inflation: in certain classes, the claims costs and
consulting firms for loss information. exposures will not be consistent as regards
inflationary impact. Example hotels may be rated
Some other factors that influence the process of ratemaking on the number of bedrooms as regards the Public
include: Liability Risk - rejected claims experience should
1. Management Expenses: As mentioned earlier, these take into account inflationary changes.
expenses are that an insurer will have to incur as he 2. Political environment: Changes in the political
runs the business and include salaries, travel and landscape can change a country or a part of the
accommodation, office expenses etc. country from a high hazard (crime risks) to a low
2. Commissions: This is particularly relevant in the hazard over a relatively short period of time and
corporate insurance market which globally tends to use vice versa. Moreover, issues such as terrorism have
professional brokers as distributional channels. As significantly increased over the past 20 years.
insurance products are not customized, hence requires 3. Technology: Over the last 3 decades, technology
tailoring and customization. Hence, commissions can has vastly improves the safety standards in many
range up to 17.5 % as of now in India. industries, by reducing manual interventions. For
3. Claims expenses: In addition to paying out claims, the examples. Printing industry has introduced
claims department has some expenses in handling of computerized presses, and just-in-time strategy,
claims that include use of expert witness, qualified improving fire risks safety is some improvements.
surveyors etc. 4. Legal changes: Changes in the legal environment,
4. No Claims Bonus / Malus: In motor insurance covers, litigation costs can change significantly the claims
there is recognized scale of discounts for risks having costs and payouts.
no claims - being rewarded as the 'No claims Bonus'. 5. Attractiveness: Items such as mobile phones,
This is used in many countries to encourage the insured Laptops are attractive in the first year but with the
to drive carefully and if there is a small claim, to falling prices and greater availability move them
consider treating that as "self insured" rather than into commodity areas and relatively unattractive
jeopardizing his no claim bonus, which can be mode in comparison.
substantial after 4 years of claims free driving. As per
the Indian practice, with the stipulated 'Sun Set Clause' 6. Miscellaneous: These include climatic changes,
when the insurer settles a claim, the insured losses all global warming and their likelihood of impact on
previously accumulated No Claim Bonus. However, he flood risks etc.
can again continue to earn no claim bonus for claims
free years at subsequent renewals. Finally while summing up:
5. Loading / Malus: There is also a reverse scenario Pricing or the appropriate Rate Fixing is very significant to
where insurers load the premiums as per a published the success of any insurance venture. Underwriting profits
schedule when the claims experience is bad. Such needs to be the consistent objective at this Corona affected
loading of premium when the claims experience is poor backdrop of the Indian Insurance Market. The basic pricing
is known as Loading / Malus. Conditions when such premiums in: claims out -leads to pure premium. Pure
loadings are done and the amount of loading are premium needs adjustment for all the working expenses and
disclosed in advance. In many countries, certain caps normal outgoings of any insurer. Technical rate and book
are imposed on the loading. Indian Motor Insurance, rate are critical for long term underwriting profits.
for instance, caps some loadings at 100% and some Operational premium issues include rating, catastrophe
types of loadings at 200%. loading and commercial discounting, but when survival is the
6. Trends: The insurer needs to collate the historical focus - Insurers can never be ignorant about this critical
information relating to losses / claims and exposures. need of the underwriting prudence and simply now drastically
However, it is critical that notice is taken of trends - past, depend on their underwriters' acumen.
present, and future that will affect the assumptions
coming from these statistics. This should be done in a Reference:
structural format and there are a number of areas that Different contemporary discussions & information as
need to be considered by the portfolio underwriters. Some collected and collated from various text materials available
of these indicators or trends can be: on-line & in hard copies.
The Insurance Times, December 2020