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Analysis of National Grid Claims. Introduction. Assumptions & Limitations

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1 Analysis of National Grid Claims Introduction In this section we have undertaken a high level claims analysis of National Grid s (NG) loss experience to date. The details of our assumptions and methodology
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1 Analysis of National Grid Claims Introduction In this section we have undertaken a high level claims analysis of National Grid s (NG) loss experience to date. The details of our assumptions and methodology are set out below. This has enabled us to undertake an analysis of the efficiency of National Grid s insurance purchasing in the subsequent section. To achieve this, we have attempted to estimate the competitiveness of NG s insurance programme, through a benchmarking exercise, to compare current premiums with those commercially available in the current insurance market. We then go on to forecast the associated insurance costs going forward to 211/12. Assumptions & Limitations We have been provided with claims data by National Grid for the following risks: Employers Liability (EL): - ground-up EL claims experience for the UK Regulated Gas business for all claims reported in the period 1st April 1996 to 1st Feb ground up EL claims experience for the UK Regulated Electricity business for all claims occurring in the period 1st April 1996 to 1st Feb 26. Motor Own Damage (MOD): - ground-up Motor own damage claims reported on or after 1st October 21 where such claims have been reported. The numbers do not include the costs of temporary hire vehicles. The claims experience is in respect of the UK Regulated Electricity businesses only. Motor Third Party (MTP): - ground-up Motor Third Party claims occurring on or after 1st January 2 where such claims have been reported. The claims experience is in respect of the UK regulated businesses but does not include former National Grid Company (Electricity Transmission) claims occurring prior to 1st April 23 as these were insured under an alternative arrangement with Summit, for which there is not an individual claims experience available. Personal Accident (PA): - ground-up PA claims experience for the UK Regulated Electricity business in the period 1st April 1996 to 28 th February ground-up PA claims experience for the UK Regulated Gas business in the period 1st April 1996 to 28th Febraury 26. Property / Business Interruption, including Terrorism (Property): - ground-up PDBI claims experience for the UK Regulated Gas business for claims with a reported value above 1, occurring in the period 1st April 1996 to 28th February 26. There is no data available for losses below 1, as these costs are retained within departmental budgets and are not reported to the insurance department of NG. - ground-up PDBI claims experience for the UK Regulated Electricity business for claims occurring in the period 1st April 1996 to 31st March 23, and claims data with a reported value estimated above 25, occurring in the period 1st April 23 to 28th February 26. There is no data for losses below 25, for the period 1st April 23 to 28th February 26 as these costs are retained within departmental budgets and are not reported to the insurance department. - Claims experience for the UK electricity business transformer losses occurring in the period 1st October 1995 to 28 February 26. Public Liability (PL): - ground-up PL claims experience for the UK Regulated Gas business for all personal injury claims; third party property damage claims with a reported value above 1, to the period ending 31st December 1999; and thereafter third party property damage greater than 3,. The claims experience is in respect of the period 1st April 1996 to 28th February Claims data for third party claims for the UK regulated gas business reported with a value of below 3, in the period 1st March 21 to 28th February ground-up claims data for the UK Regulated Electricity business for the period 1st April 1996 to 28th February 26. Travel: - Travel claims data for the UK Regulated Gas and Electricity above the 5 franchise for claims occurring after 31st December 22 to 28 th February 26. There are no details of claims below the franchise as these are dealt with from operational budgets. Whilst the following risks form part of the NG Insurance Programme, we have either not been provided with claims data, or there are no claims arising from these risks: Aviation Liability Directors & Officers (D&O) Employment Practices Liability (EPL) Professional Indemnity (PI) Claims have been revalued to today s prices using an appropriate index, to counter the effects of inflation and in order that historic years can be compared on a like-for-like basis. The following indices have been used: For EL, Motor TP and Personal Accident risks, claims have been revalued using an inflation rate of 12% per annum. This is based on an index of claims inflation produced by the International Underwriting Association in their Third UK Bodily Injury Awards Study. The 12% claims inflation rate reflects the increasing costs in terms of legal fees and damages awarded for liability and injury claims and is in line with current actuarial and insurance market practice; For Motor OD, PDBI and Travel we have used the UK Retail Price Index (RPI) as claims inflation for such short-tail risks closely tracks this inflation index and all damage is property related and is therefore not subject to the high court inflation associated with liability claims; and For PL we have used an average of 12% per annum and UK RPI to reflect both the Personal Injury and Property Damage elements of these claims respectively. All figures are in unless otherwise stated. The loss experience for those risks under consideration are subject to inherent uncertainty, which is reflected in the methodology used. Moreover, variation around the ultimate loss costs obtained is likely. Causes of such variation include: adverse development or late notification of individual large claims or groups of claims; liability claims arising from new causes or sources; shifts in patterns due to changes in, say, the social, legal or political environment. We have carried out basic checks in respect of reasonableness of the data. However, we have not audited the details and source of the data and have therefore relied on its accuracy and completeness. Although actuarial techniques and principles have been applied in the analysis for this report, this report should not be regarded as a formal statement of actuarial opinion. Current Insurance Programme Structure The existing insurance programme is as follows: Figure 1 Current Insurance Programme Structure (All Figures in ) Electricity Class Limit Deductible Aggregate Current Premium Employers 5m Nil n/a 254,129 Liability Public 5m (included 25, 75, 2,24,767 Liability in EL) PDBI 48m 25, * 2,, 5,576,338 Personal 5 x gross Nil n/a 24,954 Accident pensionable slary 1, per 1 399,236 Motor OD vehicle, 25 personal effects Franchise 5m property Nil n/a 523,587 Motor TP damage to third parties for commercial vehicles ** Medical & 5 26,174 Travel associated expenses 1m, personal baggage 4,, personal money 25 Franchise Professional 5m 1, Included in PL Indemnity D & O $US 25m US$ 75, 298,149 Employment Practices Liability 5m Nil n/a 38,17 Aviation Liability 15m, noise third party 5, Noise 5, baggage 75 18,41 * except Transformers & Quads. Breakdown (inc.transformers) 2.5m, Terrorism 2m, BI 2m e&e/agg. ** 5m terrorism property damage to third parties, 5m property damage to third parties non-commercial vehicles, 5, vehicles going airside, otherwise unlimited. *** In all cases the covers are insured with National Grid Insurance Co Ltd (NGICL), with the exception of D&O and Aviation Liability. Figure 2 Current Insurance Programme Structure (All Figures in ) Gas Class Limit Deductible Aggregate Current Premium Employers Statutory limits Nil n/a 3,432,577 Liability Public 5m (included 25, 5, 5,346,44 Liability in EL) PDBI 48m 1m * 5,, 3,756,65 Personal 5 x gross Nil n/a 646,447 Accident pensionable slary 5m property Nil n/a 1,936,537 Motor TP damage to third parties for commercial vehicles or terrorism** Medical & 5 9,23 Travel associated expenses 1m, personal baggage 4,, personal money 25 Franchise Professional 5m 1, 382,453 Indemnity D & O $US 25m US$ 75, 192,675 Employment Practices Liability 5m Nil n/a 145,6 * Underground plant 1m e&e/agg, marine pipelines 25,, estuarine crossings 125,. ** 5, vehicles going airside, otherwise unlimited. *** In all cases the covers are insured with National Grid Insurance Co Ltd (NGICL), with the exception of D&O. Claims Summaries & Analysis Each risk contains 6 tables for each of the risks analysed within this report. The tables can be interpreted as follows: Claims Summary Summary of the loss experience, showing paid, outstanding, total and revalued total claims, and the number of non-zero losses. Loss Banding This table shows the distribution of claims by size, where all individual claims are allocated to various mutually exclusive bands. As-if Retention Analysis Claims retained, as if various each and every loss deductibles had been in place historically. As-if Transfer to Insurers Claims transferred to insurers are shown as if various each and every loss deductibles had been in place historically. As-if Transferred Cost to insurers exposure adjusted & developed Claims transferred to insurers are shown as if various each and every loss deductibles had been in place historically. These transferred costs are then shown adjusted for historical variations in exposure. In addition, for long-tail liability claims (i.e. EL, PL and Motor TP) costs have been developed to ultimate, using loss development factors derived by Watson Wyatt, NG s actuarial consultants. For all risks, a view is then taken of the revalued loss history, adjusted for exposure and developed in the case of liability claims, and an appropriate average taken to estimate future loss costs transferred to NGICL or external insurers. Insurer Profitability An assessment of the historical profitability of insurers by comparing transferred costs to insurers versus premiums. Example - Employers Liability Electricity Employers Liability Electricity - Claims Summary Number Non-Zero Paid Outstanding Incurred Revalued Total 1992/93 2 8,12 8,12 39, / ,599 67, , / ,489 42, , / ,333 91, , / , , , / ,71 92,71 257, /99 7 6,277 6, , / 2 36,524 36,524 8,743 2/1 4 26,45 26,45 51,48 21/ ,641 2, , ,568 22/3 (6 month policy) 2 33,763 15,39 184, ,768 23/4 1 2, 15, 17, 23,884 24/5 2 52,5 52,5 65,856 25/6 Total 5 829, ,833 1,68,761 2,751,584 Several points are worthy of highlighting from the above table. Loss frequency has historically been relatively stable whereas loss costs have shown some volatility over the period. Approximately 22% of the experience remains outstanding. Revalued costs have varied between zero in 25/6 (albeit immature), peaking at 317, in policy year 1995/96. However, the 6-month figure for 22/3 prorates up to an annualised figure of 58,. This appears to be relatively short tail for a UK EL risk, with no outstandings prior to policy year 21/2. Employers Liability Electricity - Loss Banding Losses 5, 1, 25, 5, 1,, Unlimited Total Between: - 5, 1, 25, 5, 1,, 1992/93 Cost: 39,597 39,597 No: /94 Cost: 56, ,62 294,967 No: /95 Cost: 44,827 12, ,537 No: /96 Cost: 38, , , ,75 No: /97 Cost: 39,6 76, ,624 51, ,24 No: /98 Cost: 178,28 78, ,67 No: /99 Cost: 149, ,243 No: / Cost: 27,567 53,176 8,743 No: /1 Cost: 51,48 51,48 No: /2 Cost: 23, , ,568 No: /3 Cost: 289, ,768 No: /4 Cost: 23,884 23,884 (6 month policy) No: /5 Cost: 65,856 65,856 No: /6 Cost: No: % of Cost Retained 24.78% 15.33% 41.64%.% 18.24%.% 1.% % of Number Retained 7.% 12.% 16.%.% 2.%.% 1.% The majority of losses are concentrated in the bands below 1,, and in particular the band below 5,. 7% of the frequency of losses are contained within the band below 5,, amounting to almost %25 of costs. The largest loss, totalling 51,845, occurred in policy year 1996/97. Employers Liability Electricity As-if Retention Analysis Retained Cost Retention Level 5, 1, 25, 5, 1,, Unlimited 1992/93 39,597 39,597 39,597 39,597 39,597 39, /94 1, 156, , , , , /95 94, , , , , , /96 188, , ,75 317,75 317,75 317, /97 189,6 315,771 57, , ,24 759, /98 228,28 257,67 257,67 257,67 257,67 257, /99 149, , , , , , / 77,567 8,743 8,743 8,743 8,743 8,743 2/1 51,48 51,48 51,48 51,48 51,48 51,48 21/2 123, , , , , ,568 22/3 1, 2, 289, , , ,768 23/4 (6 month policy) 23,884 23,884 23,884 23,884 23,884 23,884 24/5 65,856 65,856 65,856 65,856 65,856 65,856 25/6 Total 1,431,92 2,3,856 2,499,739 2,749,739 2,751,584 2,751,584 Average 12,28 143, , ,41 196, ,542 The average retention within a 5, deductible is 12,. This increases to 143,, on average, if the deductible retention is increased to 1,. Employers Liability Electricity As-if Transferred to Insurers Transferred Cost Unlimited Unlimited Unlimited Unlimited Unlimited 5, 1, 25, 5, 1,, 1992/ /94 194, , /95 7,711 2, /96 128,719 21, /97 57, , ,845 1, /98 28, / / 3,176 2/1 21/2 133,231 33,231 22/3 189,768 89,768 23/4 (6 month policy) 24/5 25/6 Total 1,319, , ,845 1,845 Average 94,262 53,49 17, There has historically been little loss activity above 25,, hence there is very little market participation above a 25, deductible. The average market participation above a 5, deductible is 94,. Employers Liability Electricity - As-If Transferred Cost to insurers exposure adjusted & developed Revalued Transferred Cost - Current Programme Cost Transferred to NGICL/Insurer Exposure Adjusted Cost Developed Ultimate Cost 1992/93 39,597 29,447 37, /94 294, , , /95 165, ,12 166, /96 317,75 236,262 38, /97 759,24 564,61 793, /98 257,67 191, , /99 149,243 11, , / 8,743 6,45 94,687 2/1 51,48 38,23 58,851 21/2 256,568 19, ,384 22/3 (6 month policy) 289, , ,719 23/4 23,884 17,761 37,328 24/5 65,856 55,47 14,53 25/ Low Forecast 217,54 Medium Forecast 286,663 High Forecast 339,136 The developed ultimate costs show no clear trend over the period. As a result, our best estimate of future costs is the average over the period 1993/94 to 23/4. This is our medium forecast. A pessimistic scenario of future losses would be the average of all the bad years, i.e. excluding those years below 1, our high forecast of 339,. On the contrary, an optimistic outlook would be the average over the whole period, i.e. including the good years - our low forecast of 217,. Employers Liability Electricity - Insurer Profitability Cost Transferred to NGICL/Insurer Transferred Cost - Historic Programme Structure Insurer Historic Programme Premiums Insurer Profitability 2/1 1, each & every claim Lloyd's of London ,14 131,115 21/2 1, each & every claim Lloyd's of London 112, ,263 13,921 22/3 (6 month policy) 1, each & every claim Lloyd's of London 164, ,229-26,924 23/4 1, each & every claim NGTICL 7, 157,323 15,323 24/5 Nil NGTICL 52,5 185, ,318 25/6 Nil NGICL - 254, ,129 Total 336,19 991,92 655,883 The insurer is making a modest profit for most years, however some years are immature and therefore subject to further development of claims values. As a result this profit maybe eroded, or in fact may increase, depending on this development. The only exception is policy year 22/3, where insurers are making a loss of almost 27,. Overall, across all policy years, insurers are making a profit of 655,. It should be remembered that premiums are not simply a function of the claims experience and are also dependent on market capacity, limits purchased and policy deductibles. These same tables are replicated for each risk in the Appendices. 2 Efficiency of NG s Insurance Purchasing Introduction The claims analysis carried out in the previous section forms the basis of establishing NG s base year insurance costs. By this, we mean the total insurance spend in policy year 25/6, plus a market adjustment which incorporates the variance of our brokers estimates of premium from our pure risk premium which is calculated from the average burning cost of claims (exposure adjusted and developed). We have attempted to estimate the competitiveness of NG s insurance programme, through a benchmarking exercise to compare current premiums with those commercially available in the current insurance market, and ultimately to forecast the associated insurance costs going forward. Loss Forecasts Our approach to the claims analysis and underlying methodology and assumptions was detailed in the previous section. Historical variations in exposure have been incorporated into our analysis. Long-tail liability claims (i.e. EL, PL and Motor TP) have been developed to an ultimate position using development factors derived by Watson Wyatt, NG s actuarial consultants. In all cases, a view is then taken of the revalued loss history, adjusted for exposure and developed in the case of liability claims, and an appropriate average taken to estimate future loss costs transferred to NGICL or external insurers. Premium Benchmarking This section details our premium benchmarking approach and how we have used discussions with our brokers to evaluate the competitiveness of NG s current premiums in today s market conditions. The table below shows the current NG premiums for each risk and then alongside compares with the Marsh Broker estimated premiums. Premium Benchmark Comparison Actual 25/6 Marsh Estimate Risk Gas Distribution Gas Transmission Elec Transmission TOTAL TOTAL PL 2,747,764 2,598,28 2,24,767 7,55,811 7,, PI 132,3 25,45 incl above 382,453 3, Property/BI/Terr 1,82,47 1,953,595 5,576,338 9,332,43 1,, MTP 1,799, , ,587 2,46,124 3,989,52 MAD 399, , ,85 EL 3,296, , ,129 3,686,76 4,, EPL 122,72 22,34 38,17 183,23 183,23 D&O 192, ,149 49,824 49,824 Aviation 18,41 18,41 15, PA 533, ,721 24, ,41 64, Travel 4,143 4,88 26,174 35,197 35, Letter of Understanding 1,142,4 1,142,4 1,142,4 TOTAL SPEND 26,622,835 28,569,464 Despite some variations between the actual premiums and Marsh estimates, overall, given the extent of cover purchased, the NG premiums are competitive. Below we have made specific comments on some of these risks based on our discussions with our broking colleagues. PL The benchmark pricing for PL cover for similar sized Power & Utilities organisations is around 4m for the limit purchased, however the claims experience is high, particularly in the Gas business ( 6.5m in 25/6) which is driving cost, the captive price of 7.5m is therefore not unreasonable. The only concern we have is the fairness of the distribution of the premium across the 3 business units. The Electricity business appears to be paying disproportionately given the level of claims. EL The pricing for this risk is very much claims driven and is predominantly focused on the Gas business. Marsh brokers estimate a premium of circa 4m given the level of claims and the benefit of the large limit on the liability covers. Liability Covers In general the liability covers appear competitive, however we would query in some instances the need for such a high limit which is not typical amongst similar sized companies. Nonetheless, for casualty covers the cost of purchasing further limit at the top end is relatively cheap and therefore we would not expect significant reductions in premium for purchasing lower limits. D&O Marsh brokers feeling was that the current price for the D&O risk is fair, given the level of cover purchased, however, similar to the liability risks we would question the need for such a high limit. If D&O was purchased for just the UK business we would expect a limit of approximately 5mn and for this a premium of around 2, to 3,. EPL The current structure of the EPL policy, which has no deductible, is not obtainable in the commercial markets so it is therefore difficult to compare, however the price appears reasonable given that there is no risk to NG. In the commercial markets we would expect a minimum deductible of around 25, to 5, with a premium of approximately 1,. Motor TP The Motor TP premium is very competitive given that the average cost of claims over the last 3 years has been approximately 2.3mn per annum versus a premium of 2.4mn. The benchmark pricing for this risk in the external markets is approximately 72 per vehicle versus a NGICL rate of app
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