Loss Loads
INDECS has witnessed the increasing use of Loss Loads following insurance claims in the E&P area – and we question
their appropriateness.
For those that have not witnessed a loss load, it is typically an additional premium, in the form of a percentage of the claim amount, sought by insurers at policy renewal. Payment may be upon settlement of the actual claim or even paid upfront against the reserve, therefore due before the claim has been settled and adjusted up and down as the reserve fluctuates until final settlement.
The argument put forward by the majority of brokers is that it is better to have a “one-off” Loss Load rather than an increase applied to the base rates. We might understand that line of explanation if it meant that insurers no longer considered the overall claims experience going back three to five years when it came to generally renewing rates, but that simply is not true. We think there might be a degree of “having your cake and eating it” going on here.
The concept of loss loads (on specific, individual claims) arose from the broker argument that the large losses were “spike” events.  The insurer would generally accept certain claims were outside of usual claim activity and brokers/assureds would argue that such events should not attract punitive rate hikes.  The argument has some symmetry and logic.
It is equitable that insurers apply rate adjustments in line with loss ratio (excluding claims with loss load) but what is not clear is at what level does a loss load kick in?
The reaction by our clients tends to be twofold. Firstly, “So the premium I pay for my insurance works on the basis that there are no losses?”, and secondly, “I thought this was already addressed in the loss of (or effect on) my No or Low Claims Bonus.”
Interestingly, when a Loss Load is collected it does not necessarily benefit those insurers that have contributed to the claim. A Loss Load is typically applied at the renewal immediately after a claim has crystallized (e.g. more clearly quantified). By this we mean that insurers have become more aware of the claim through reports issued by its loss adjusters – and, most significantly regarding the claim quantum. Claims regularly take a period of time to settle, and it is not unusual to see a loss that impacts a particular group of insurers (when it occurred) in one policy year crystallize a number of years later, when the Loss Load is set. For many reasons, totally independent of the claim itself, insurers on the latest policy will have changed. Is it right that new insurers, who did not suffer the loss, benefit in a share of the Loss Load? If such Loss Loads are deemed acceptable shouldn’t a share of them be given to those insurers that have both paid the claim and have stood by the client to recognise their loyalty.
We suggest that if insurers want Loss Loads on particular accounts, then the insurers and insured should agree that the policy is subject to either a No/Low Claims Bonus or a Loss Load (essentially making the policy a quota share placement) – but not both.
If the Loss Load is the chosen method to take into account claims experience, then shouldn’t the methodology be agreed prior to the loss taking place and only to be levied when the claim is finally paid in full? We have witnessed Loss Loads that increase the percentage applied for higher ranges of claim. Is this appropriate? Wouldn’t it be more reasonable that the percentage applied went down as the claim it was applied to got bigger? There should also be a pre-agreed level of claims experience under which no Loss Load applies.
Whichever way is chosen – Loss Load or No/Low Claims Bonus, for a client with a corporate programme covering a broad geographic area within which there are a multitude of business units, it can be something of a nightmare explaining to one unit that it has to contribute to something which it has nothing to do with. We are planning to issue a future INSIGHT on Premium Allocation generally.
As always, if there are specific areas you would like us to address within an INSIGHT please do not hesitate to contact
us.