Hi, Are insurers allowed to increase its premiums in order to recoup past losses? I always thought they are not allowed, and could only increase its premiums in anticipation of changes of future experience (e.g. increase expected future claims), so Ch18 (analysis of experience) p21 - Phase 4, 2nd paragraph, “Eventually premium rates will increase to cover the losses being incurred”, is puzzling me. Many thanks! M.
Insurers can only review existing premiums if experience changes. But, if they were making a loss overall, just like any business, they would look to increase new business prices to try and recover some of these losses. As the insurance cycle suggests, phase 3 (losses) will lead to some insurers leaving the market, and so reduced competition means there may be some capacity to increase premiums. Eventually profitability will return and we're back at phase 1.
Hi Sarah, Sorry but I am still a bit unclear. I came across an exam question (Sep16 Q2ii), asking what the high level principles the insurer should follow when reviewing its existing business (with reviewable premium contracts). The solution pointed out 'At reviews, healthcare company should not aim to recoup earlier losses from claims', which seems to contradict with your response? Is there anywhere in the regulation, professional guidelines that provide guidance on this matter? or whether insurer is allowed to recoup past losses (say for reviewable contracts) depends on the policy wording in practice? Thanks M.
Hi Yes, for reviewable premium business, at reviews, the insurer cannot recoup earlier losses. This is what I was trying to say in my first sentence. Exactly what the insurer is allowed to review premiums for will be clearly set out in the insurer's policy literature. It may, or may not, include claims but if it does, it should be to reflect the changing claims experience across the whole portfolio (to prevent future losses) rather than recoup losses already incurred. But, it can increase premiums on new business if it is making a loss overall which was your original point Sarah
