Pricing and Underwriting for Class Actions

Transcription

1 Pricing and Underwriting for Class Actions Susie Amos, Patrick Zhang Finity Consulting Pty Ltd 2014 This presentation has been prepared for the Actuaries Institute 2014 General Insurance Seminar. The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions.

2 The next step.. Concerns Statistics Pricing framework The potential impact

3 Class action claims have contributed about 18 notified per year $40m average settlement $8,500 per D&O policy 65% to the annual D&O loss ratio Could increase up to 85% Estimates based on a) compiling public case information, b) NCPD AND c) a number of approximations /assumptions

4 The next step.. Concerns Statistics Pricing framework The potential impact

5 Concerns Class actions are on the rise Well established regulation. $1.2bn settlements to date for security class actions Filings continue after GFC Class Actions Lawyers Litigation Funding Insurance Industry

6 Concerns Recent settlements are significant Settlement Amount ($m) Securitiy Class Action Settlements Centro $200m NAB $115m Sigma Pharmaceuticals $57.5m Nufarm $46.6m Transpacific Industries $35m Credit Corp Group $6.5m GIO $112m Aristocrat $144.5m Downer EDI $20m Sons of Gwalia $70m Multiplex $110m AWB $39.5m Oz minerals $60m GPT $75m Settlement Year Source: Class Actions in Australia The Year in review, King&Wood Mallesons

7 Concerns Types of actions have broadened Average of 18 actions filed per annum from listed and 5 from non-listed companies Consumer Securities Natural Event Non-Financial Product Public Interest Other Financial - Company Breach Financial - Contract Breach Unknown Source: Finity Class Action Database compile from various publicly available information

8 Concerns Class actions are on the rise Lawyers Class Actions Litigation Funding Regulation still a hot topic 11 funders (6 Australian) 20-40% of settlement Money making New firms New types of actions Insurance Industry

9 Concerns Class actions are on the rise Class Actions Lawyers Litigation Funding Insurance Industry Significant costs emerging Uncertainty of coverage Players trying to avoid, or take smaller layers or shares

10 Concerns Material impact on claims cost 120% 100% Gross Loss Ratio (Ultimate) 80% 60% 40% 20% 0% Vic Bushfires Accident Year (est) D&O Target Public Liability Source: Finity ultimate estimates from NCPD

11 The next step.. Concerns Statistics Pricing framework The potential impact

12 Statistics Estimated Claim Cost vs Premium $ millions Settled Open Interest Premium

13 Statistics Frequency and Size: D&O Average Claim Size ($m) Size Frequency Frequency (per 100,000 risks)

14 Statistics Estimate by industry $ millions Settled Open Interest Premium

15 The next step.. Concerns Statistics Pricing framework The potential impact

16 What to consider Exposure Very large claims relative to premium pool Coverage and wordings tensions Accumulations Underwriting Differs by size and type of company Difficult to avoid in D&O public risks Risk continually changing Pricing Extreme loss / cat allowance Collect sufficient premium for portfolio risk Rating considerations

17 Pricing framework An Underwriting and Pricing Framework Inputs Outputs Insurer experience Publicly available Underwriting Scorecard Portfolio load Risk Relativities Qualitative knowledge

18 Pricing framework External (Environment) Underwriting Scorecard Internal (Company) Regulation Economy ASIC / ASX rules Court decisions Gov t Reviews Portfolio load Industry Listed / non-listed Internal controls Financial condition Risk relativities Stock market Funders & lawyer Merger activity US trends Director quality Market cap Complexity

19 External Environment Economy Post GFC Stabilisation Insolvencies, House Prices Mergers/IPOs Mining Construction Agriculture Manufacturing Legal Royal Commission Child Abuse?? CFA - Lawyers Litigation Funding model discontinued Insurance Coverage Great Southern Lawyers Funders Regulatory? Financial Advisors? Regulation Productivity Commission?? ASIC?? Privacy Litigation Funding and Class Actions Cool Neutral Hot

20 The next step.. Concerns Statistics Pricing framework The potential impact

21 Potential Impact Industry Class Action Price ~$8,500 per D&O policy ($25,000 for Finance) ~100% loss ratio at current rates What needs to change? Premiums need to increase by?