Loss ratios under the spotlight

The term"loss ratio" - the relationship between the amount of money paid by consumers in premiums and the amount paid out by insurers to address claims, has become almost as familiar as inflation in the current economic climate.

The broker has been the backbone of the insurance industry for as long as anyone can remember. And if some unpredictable peril should befall the insured, the broker is expected to be responsible for assisting in resolving the problem. Brokers are however, feeling the pinch as a handful of their policyholders are wearing them down when it comes to certain claims.

A new approach

The increasing number of claims is becoming more of a risk for the broker when signing up new policyholders. The true integrity of customers has added an additional risk element to a broker's selection criteria and as a result has forced a change of approach in the sector.

Brokers now need to manage their clientele roster in a very selective manner to minimise the risk of multiple claimants ultimately affecting their book.

By increasing the selection criteria in the form of ITC checks and potentially higher premiums for each and every client, the broker is in greater control of their client roster and able to minimise those who may pose a threat to their bottom lines.

Managing the loss ratio

Managing the loss ratio of the broker's book is not only a South African concern, it is an issue across the world. Each broker firm needs to ensure that regular checks on all potential customers are thorough and detailed. "Given the current state of the insurance landscape in Britain, carriers competing for customers, dealing with rising claim rates and high loss ratios, the need has never been greater for insurers to establish and maintain a complete view of their current and prospective policyholders" says Sue Winston, spokesperson for Norwich Union.

"A key part of this complete view is the specific claims risk that each customer poses to the company. Accurately predicting claims propensity throughout an organisation can dramatically improve loss ratios and enables providers to charge lower premiums to low-risk customers."

Far-reaching consequences

Loss ratio increases have been reflected in higher premiums charged by insurance companies to their policyholders in South Africa as well as restricted benefits for the policyholder when a claim is made. Policyholders should also take into account that there is a strong possibility that their policy will not be renewed should there be any sign of consistent high loss ratios through repeated claims thus affecting their broker's entire book.

Moral risk

Brokers do not dispute that claims are a necessary element of the insurance landscape, but there is a pressing need to assess the potential for the moral risk. Some insurers are finding an increase in the number of cases being identified. It jeopardises the sustainability of the rates that are charged and, ultimately, the consumer bears the brunt of this cost.