Nº 8Spring 2018

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The new rate for extraordinary risks with the Consorcio de Compensación de Seguros from 01/07/2018

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Belén Soriano Clavero
Deputy Director for the Technical Area and Reinsurance
Consorcio de Compensación de Seguros
 

1. Introduction

The Consorcio de Compensación de Seguros (hereinafter CCS or Consorcio) plays an essential role in contributing to the stability of the insurance sector and in providing general access to insuring the extraordinary risks, by means of the socialization of the price of the cover through the compensation among risks that are different because of their nature and their geographic location across Spain.

From its origins in 1954, dynamism is one of the elements that marked the ways of functioning of Consorcio, understanding it as the ability to adapt permanently the extraordinary risks cover to the circumstances of the insurance sector.

Within this framework, the surcharges for extraordinary risks with Consorcio have being adjusted in recent years considering the evolution of its equalization reserve, the losses from extraordinary risks’ claims and the sufficiency of Consorcio to face up different PML scenarios.

As the most immediate precedents of the revision of the rate for CCS’ extraordinary risks we could mention the reduction carried out in November 2008, which meant a mean cut of 15% of the rate as a whole, and the reduction in the surcharge of the rate for automobiles, a cut of 40% applied in 2016, that came along with the extension of the cover for extraordinary risks to vehicles only counting with mandatory third-party liability insurance.

This new rate for extraordinary risks (ER) was approved by Resolution of 28 March 2018 by the Directorate-General for Insurance and Pension Funds (DGSFP) and has a triple objective: (i) to slow down the growth rate of the equalization reserve; (ii) to simplify the practical application of the tariff; and (iii) introduce several technical and methodological improvements that were already being used after their publication in the Consorcio webpage.

The following lines show the essentials of the actuarial study supporting the new rate. This analysis has been carried out independently for each risk line covered, that is, property loss, personal injury and business interruption.

The principle of compensation among risks has being kept, being the proposed tariff unique for all risks covered (natural and man-made), as well as the principles of geographical compensation, being no distinction among areas made, and compensation over time.

Base data are going to be, in all cases, property of CCS both in risk exposure (exposed capitals, after the statistical information given by insurance undertakings, and income from surcharges) and in losses paid during the period 1987-2016 (2004-2016 for business interruption).

The rate in force until 30 June 2018, approved by Resolution of 27 November 2006 by the DGSFP, is summarized in the following table:
CURRENT RATING:
ANNUAL rate out of sum assured or
ANNUAL loading in euros
Homes and owners' assns. thereof 0.08‰ + 0.005‰ for pecuniary losses
Offices 0.12‰
Business & other simple risks 0.18‰
Industrial 0.21‰
Civil works from 0.28‰
Motor vehicles Private car: 2.10€
Pecuniary losses 0.25‰. except housing
Persons (life and accidents) 0.005‰ and 0.00042‰

2. Rate for property damage

Trends in the key figures regarding ER insurance property feature in the table below:
GLOBAL FIGURES FOR EXTRAORDINARY RISK - PROPERTY DAMAGE
Year Capital exposure Loading Claims Combined ratio
1987 1,286,820 145 446 308%
1988 1,351,161 152 144 95%
1989 1,418,719 216 367 170%
1990 1,489,655 234 74 32%
1991 1,587,883 253 95 37%
1992 1,742,521 271 121 45%
1993 1,843,044 284 77 27%
1994 1,946,266 293 163 56%
1995 1,961,764 304 175 58%
1996 2,076,836 320 225 70%
1997 2,285,820 352 417 118%
1998 2,565,171 374 104 28%
1999 2,655,789 396 199 50%
2000 2,674,980 426 290 68%
2001 2,933,079 449 279 62%
2002 3,059,057 453 237 52%
2003 3,383,884 500 175 35%
2004 3,642,977 530 184 35%
2005 3,832,693 564 254 45%
2006 4,221,980 602 293 49%
2007 4,417,284 625 375 60%
2008 4,583,416 661 367 56%
2009 4,865,635 624 852 136%
2010 5,014,652 601 525 87%
2011 5,105,029 606 744 123%
2012 5,116,512 600 327 55%
2013 4,983,067 614 228 37%
2014 5,113,296 632 214 34%
2015 5,271,947 645 233 36%
2016 5,351,376 641 252 39%
TOTAL 97,782,313 13,367 8,437 63%

Figures in millions of euros updated as of 31/12/16.
Source: ER Statistical Records, 1971-2016 Series.

The average combined ratio of 63% has made it possible to provide for the reserve mentioned in the previous section and consider a reduction in the rates to be applied.

Given that the combined ratio by risk class is given, we can note an uneven performance for the different groups:
COMBINED RATIO
YEARS RISK CLASS - PROPERTY TOTAL PROPERTY
Homes Offices Bus. and oth. s. risks Industrial Civil works Motor vehicles
DATASET: 1987 - 2016 51% 117% 139% 60% 329% 32% 63%

Source: ER Statistical Records, 1971-2016 Series.

The groups in deficit will not have their rates changed for the following reasons:
 
  • Offices, this is a group that lacks critical mass (it represents 1.8% of capital exposure, 1.1% of loading and 2.2% of claims incurred for the dataset under review).
     
  • Business and other simple risks, although this is a group that is permanently in a state of imbalance, it can be joined to another group with a favourable result on average, industrials, thereby achieving not only a technical balance but also simplification of the rate since it is not always easy to deal with factors such as “processing”, “handling” or “stock of industrial machinery” to differentiate between one group or another.
     
  • Civil works, even though this is a grouping with a high level of claims, it does not have enough critical mass (0.1% of capital, 0.6% of loading and 3% of claims incurred).
 
Likewise, the rate for motor vehicles will not be changed either given that it has already been reduced by application of the DGSFP Resolution of 31 May 2016.

In this situation actuarial techniques have been applied to determine the new rates for the groups:
 
  • Homes and owners’ associations thereof 
  • Business, industry and other risks.

The next steps in the process of premium price formation and the results that have been obtained are as follows:
 
a) Pure risk premium (Pr)
Is the mathematical ratio between the set of pay-outs valued as the annual mean of claims assumed by the CCS in the dataset analysed and the corresponding mean amount of capital exposure. The calculation is done by risk class.

Pr = Mean pay-out / Mean capital exposure
 
b) Loaded risk premium (Pr rec, for the Spanish)
Given the nature of the risks covered, particularly as regards earthquakes and volcanoes, where the claims experience is little or negligible, and for the sake of technical equilibrium, it becomes necessary to factor in a significant “loading for contingencies” to cover random and unfavourable deviations in terms of loss events in relation to their mean value which, together with the equalisation reserve, contributes to the stability of the system given that no mechanisms currently exist for transferring risk.

Pr rec = Pr x (1 + loading for contingencies)
 
c) Tariff rate (P”)
The tariff rate is defined as:

P” = Pr rec + g P”, in other words:

P” = Pr rec  / ( 1 – g)
 
where:

P”: is the tariff rate
Pr rec: is the loaded risk premium
g: is the percentage of expenses out of the premium

From aggregating the various elements described we can obtain the annual business premium rates which, while keeping to the balancing principle, appear fair and adequate according to the nature of the risks written by the CCS.

The results obtained are given in the following table:
PROPERTY DAMAGE RATES TO APPLY
UP TO 30/06/2018
RATES TO APPLY
FROM 01/07/2018
Homes & owners' assns. 0.08‰ 0.07‰
Offices 0.12‰ 0.12‰
Business and oth. s. risks 0.18‰
0.18‰
Industrial 0.21‰
Civil works from 0.28‰ from 0.28‰
Motor vehicles Private car: 2.10€ Private car: 2.10€
d) Other significant adjustments
 
1. Reduced rates: to applied to capital over 600 million euros:
 
It is considered worthwhile to continue with this system of rating and the “reduced rate / normal rate” ratio that currently holds, with the reduced rates being left at the following values:
 
For housing : 0.05 per mille
For offices :  0.08 per mille
For business, industry and the rest:  0.15 per mille  

2. Temporal nature
: The established rates are benchmarked annually; for policies lasting less than or over a year an adjustment is made in proportion to the fraction of time to which the policy cover extends.

3. First risk insurance: To lessen the complexity involved in applying the table of first risks, the number of brackets has been reduced as per the following table:
Bracket by %
Limit / Capital exposure
Ratio ("C" for the Spanish) Percentage P
From 0 to 10 3.5 20%
Over 10 to 27 2.4 36%
Over 27 to 50 1.7 65%
Over 50 to 75 1.3 86%
Over 75 to 100 - 100%

Loading = MAX (C x rate x Limit; P x rate x Capital exposure).

The loading is graphically represented thus (for one million euros of capital exposure and first risk insurance rising from 1 euro to 100% of capital exposure):
From the chart it can be seen that in all situations the loading from applying the new rate (red line) is going to be less than or equal to the preceding loading (blue line).

3. Rate for personal injury

Data trends for ER for personal injury are as given below:
GLOBAL ER FIGURES - PERSONAL INJURY
Year Capital exposure Capital w/o accidents in travel Loading Claims incurred Combined ratio
1987 3,481,899 1,768,805 7 3 43%
1988 3,655,994 1,857,245 8 2 27%
1989 3,838,794 1,950,107 11 3 28%
1990 4,030,734 2,047,613 12 2 21%
1991 2,751,037 1,201,873 14 4 32%
1992 2,829,755 1,322,514 16 5 30%
1993 3,413,063 1,421,746 16 3 16%
1994 3,440,023 1,747,532 17 2 14%
1995 3,181,540 1,842,493 18 5 27%
1996 4,389,550 2,943,457 18 5 27%
1997 5,183,981 2,738,801 22 3 14%
1998 5,563,230 2,656,554 22 3 13%
1999 7,563,950 2,459,192 23 2 8%
2000 8,643,360 2,634,496 23 7 31%
2001 6,352,016 2,323,313 24 4 18%
2002 6,719,327 2,184,588 28 3 12%
2003 6,456,719 2,492,810 29 3 10%
2004 8,498,249 2,849,293 28 52 188%
2005 8,560,409 3,131,055 25 2 7%
2006 10,449,332 3,184,956 28 3 11%
2007 10,685,547 3,365,520 27 6 21%
2008 12,281,108 3,493,730 25 5 20%
2009 11,777,356 3,589,738 24 4 15%
2010 9,731,760 4,647,110 24 4 17%
2011 9,469,615 4,714,353 23 5 20%
2012 7,919,376 4,425,347 22 2 8%
2013 8,578,188 4,357,720 20 2 9%
2014 9,345,735 4,367,823 15 1 8%
2015 9,213,095 4,961,067 17 3 17%
2016 10,149,209 5,308,036 18 1 8%
TOTAL 208,153,951 87,988,886 604 150 25%

Amounts in millions of euros updated as of 31/12/16.
Source: ER Statistical Records, 1971-2016 Series.

The average combined ratio of 25% has made it possible to allocate funds to the reserve mentioned in section one and enable deal with a reduction in the rates to be applied.

For personal injury there are two rates, the normal rate (currently at 0.005 per mille) that applies to all life insurance policies (exclusively or mainly for death) and those for accidents, except for “travel accident policies associated with paying for the journey with a credit card”, to which a reduced rate is applied (0.00042 per mille).

The procedure followed in the above section is also pursued to establish the new normal rate for persons. For these purposes all the claims incurred in the dataset are set against the capital without accidents in travel, since no policy of the kind “travel accident insurance policies associated with paying for the journey by credit card” has claims incurred; finally, the reduction obtained for the normal rate (of 40%) will be applied to the reduced rate.

The results obtained are:
PERSONAL INJURY Rates to apply
up to 30/06/2018
Rates to apply
from 01/07/2018
Persons (life and accidents) 0.005‰ y 0.00042‰ 0.0035‰ y 0.00025‰

Other significant adjustments:

  1. Fractional premiums: the additional loading of 10% is being removed.
     
  2. Temporal nature: The established rates are referenced for a year; for policies lasting less than or for more than the year an adjustment is made in proportion to the fraction of time to which the policy’s coverage extends.
     
  3. First risk insurance: To reduce complexity in applying the rate and given the fact that it is of little use as regards personal injury, the table is being eliminated and rate setting is done as a limit per tariff rate.

4. Rate for business interruption

Trends in data relating to ER for business interruption are as given below:
GLOBAL ER FIGURES - BUSINESS INTERRUPTION
Year Capital exposure without housing Loading Claims incurred Combined ratio
2004 52,456 0 0 7%
2005 186,717 33 18 56%
2006 196,683 42 10 23%
2007 182,486 45 9 20%
2008 224,263 48 10 20%
2009 233,647 44 20 46%
2010 237,154 42 35 85%
2011 219,201 44 34 77%
2012 227,509 45 11 25%
2013 222,210 41 9 22%
2014 244,986 44 5 12%
2015 263,255 46 9 20%
2016 300,775 54 6 12%
TOTAL 2,791,343 527 176 34%

Amounts in millions of euros updated as of 31/12/16
Source: ER Statistical Records, 1971-2016 Series.

The combined ratios for the two existing groups, housing and the rest, are thus:
YEARS Risk class - BUSINESS INTERRUPTION TOTAL ASSETS
Housing Rest
2004 - 2016 SET 20% 38% 34%

Source: ER Statistical Records, 1971-2016 Series.

Again, these results have enabled a potential reduction in rates to be studied.

After repeating the procedure for the two existing rates, housing and the rest, the results obtained are:
PECUNIARY LOSSES Rates to apply
up to 30/06/2018
Rates to apply
from 01/07/2018
Housing 0.005‰ 0.0035‰
Rest 0.25‰ 0.18‰

Other significant adjustments:

  1. Temporal nature: The established rates are referenced for a year; for policies lasting less than or for more than the year an adjustment is made in proportion to the fraction of time to which the policy’s coverage extends.
     
  2. Specific rates: Application of these is being extended and the requirement removed whereby BI coverage has to be expressed as a percentage of damage capital. To calculate the specific rate the current specific rate to asset rate is being maintained, which leaves the specific rates at 0.135‰ and 0.195‰, for offices and others respectively.

5.Overall results


The estimates for the impact of the new tariff for extraordinary risks on the annual income of the CCS throw up a result of an expected reduction of 13%.
 
If this had been applied in the 2017 financial year, it would have represented an income reduction of 95 million euros, as can be observed from the following table.
Accrued loading for
current tariff
in 2017
Reduction in annual
loading from applying the
new tariff for 2017
Estimated accrued
loading for new
tariff 2017
(without collecting commission) €MILL. % (without collecting commission)
Property 643 -71 -11% 572
Persons 19 -8 -42% 11
BI 54 -16 -30% 38
TOTAL 716 -95 -13% 621

Amounts in millions of euros

This new rate for extraordinary risks (ER) was approved by Resolution of 28 March 2018 by the Directorate-General for Insurance and Pension Funds (DGSFP) and has a triple objective: (i) to slow down the growth rate of the equalization reserve; (ii) to simplify the practical application of the tariff; and (iii) introduce several technical and methodological improvements that were already being used after their publication in the Consorcio webpage.
 
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