It is important for all owners, but especially the scheme executives, to understand how the ratio of insurance claim value to premiums paid influences their insurance premiums and renewal of their policy. This is called the buildings policy claims ratio ( or loss ratio)
The below article was published on 17 Jan 2023 by Mike Addison and can be found on the Addsure Website – https://addsure.co.za/claims-ratio-in-a-nutshell/
It is important for managing agents and trustees to understand the concept of claims ratio and how it affects policy renewal.
A buildings policy claims ratio (or loss ratio) is the ratio of claims to premiums; in other words, the percentage of claims to premium over a given period. If the loss ratio for the year is 55% it means that for every R100 of premium collected by the insurer during the same period, R55 was paid out in claims. For the insurer to make a profit or stay in business, a reasonable overall claims ratio must be achieved.
In the sectional title environment, a claims ratio of 35-55% is desirable to maintain stable premium rates. As commission and policy underwriting costs make up 30-40% of the premium, a loss ratio of 60% may result in a break-even position for the underwriting manager/insurer.
What does this mean?
To deal efficiently with the insurance renewal process, the trustees should be well-informed on the claims ratio. Rule 29.1.(a) states that the trustees must negotiate premium, excess and rate.
The sum insured amount x the rate = premium
Example: A 40-unit building that is insured for R40 million:
Sum insured: R40 million
Premium rate: 0.084%
Premium (annual): R33 600
Excess (standard): R500
R40 million x 0.0840% = R33Â 600
With this policy (at a rate of 0.084%), an acceptable claims ratio is 45%.
Total claims = R15 000 (three claims of R5 000 each – geyser claims)
R15 000 claims vs R33,600 premium for the year = 45% claims ratio
If three more geysers are replaced, one of which adds resulting damaged for
R10 000, R25 000 is added to the annual loss (R15Â 000 + R10Â 000), i.e., the claims paid amount to a total of R40 000 for the year.
R40 000 claims vs. R33 600 premium for the year = 119% claims ratio.
To get back to a 50% claims ratio, the insurer must double the premium.
Alternatively, they need to reduce the claims with an increased excess structure. By increasing the excess by 30%, an unsustainable policy is corrected.
Trustees’ mandate
The trustees should receive a claims history summary upon annual renewal of the policy. From this, they will be able to obtain their insurance rates and excesses.
The trustees are mandated to negotiate excess, premium and rate; this is where an experienced insurance broker is invaluable.
Along with the annual renewal invitation, the insurer should also include a letter of advice and comparative quotes. The advisor/broker should advise the trustees on the premium, excess and rate.
For example: The geysers of a 40-unit complex that is six years old need has insurance for geyser replacement. Unless the trustees relook their insurance’s excess structure, a surge in geyser claims can be expected over the next two years which will lead to increasing premiums.
Trustees, managing agents and insurance advisors should play an active role in managing their insurance by restructuring excesses and rates to sure that the costs are realistic and sustainable. Each building has a unique set of owners which may require a customised approach. For example, a building with many pensioners may well prefer a lower excess and higher premium to limit unexpected costs, whereas a building with many high net-worth owners may prefer a higher excess and long-term lower rates.
If the role players understand the main principles that determine the premium, they will be better positioned to negotiate the most suitable excess and rate combination for their building.
Written by Mike Addison, Addsure – 17 Jan 2023
