A major Australian insurer has stated that liability insurance premiums are likely to rise.
CGU chief executive officer Peter Harmer said insurers set aside the majority of premiums they received on ‘long tail’ business to pay future claims, and these reserves were typically invested in government bonds, other fixed interest securities and cash.
“We factor the projected investment income on these claims reserves into our pricing, so a sustained period of falling rates tends to push premiums up.
“Classes of business where claims often take a long time to settle – known as ‘long tail’ – are most vulnerable to rate movements because the average investment period is much longer, and therefore the reliance on investment earnings is greater.”
Advisers will be concerned to hear that key ‘long tail’ products include professional indemnity. Other products on the hit list include general liability, directors and officers liability, and underwritten workers’ compensation insurance.
Harmer said liability insurance rates would have needed to rise by at least 8% to offset the fall in investment yields that have flowed on from the 150 basis point reduction in the cash rate since November 2011.
“While we are doing all we can to keep premiums affordable, we’ve got to ensure our pricing remains sustainable,” he said. “We can’t ignore these sorts of major external impacts over the long-term.”
Claims reserves are invested on average for around five years at CGU for general liability products; for professional indemnity and directors and officers insurance it is just over three years; and for underwritten workers’ compensation about 2.5 years, Harmer said.
“When interest rates fall, there is a multiplying effect on the upfront premium increase we need to charge a customer to offer the same level of cover,” he added.