1960s and 70s: booming markets and ballooning losses in motor
50 years of sigma
The first issue of sigma came out in January 1968, when the insurance industry – particularly in the western world – was enjoying tremendous growth. The post-war economic boom had made nations and many more people wealthier. With previously unknown levels of broad-based prosperity came more and new insurance opportunities. New markets were emerging as well. For example, in the 1950s, Hong Kong was the first to start the Four Asian Tigers success story that carried on until the late the 1990s.
Motor premium development from 1948 to 1966
sigma No 6/1969
In the 1960s, however, insurance market development took place mostly within the confines of national borders. The rise of nationalisation, capital transfer restrictions, import substitution policies, tariff systems, and the Iron Curtain all curbed the appetite for cross-border business. The variety and different extents of state intervention led to significant differences in markets and their regulatory frameworks. The lack of international agreement on trading services further hindered development of cross border insurance business. The only functioning hub for international insurance transactions was the so-called London Market where exceptionally large and difficult risks were insured. No wonder then that in 1971, sigma noted that the number of "foreign insurers" operating in global markets was significantly less than in previous decades. Strong economic growth in home markets provided amply insurance potential, and made foreign business riskier and unattractive.
With new insurance opportunities also came new challenges. The complexity, number and size of risks had increased beyond the capabilities of traditional rating methods. The second issue of sigma in February 1968 explained the problems in marine. As ships became bigger, more risk was accumulated under one insurance policy. In the first half of the 1960s, the number of ships increased by 12%, but the number of total losses spiked 40%.
The growth of the industry had also caught the attention of the authorities. A general trend in western societies to protect consumers led to increased government intervention. State-imposed tariff systems on insurance premiums became the norm and an increasing number of insurance areas were socialised. There were organisational problems as well. The very first sigma in January 1968 addressed one of the primary problems facing the industry - operating costs. The burgeoning sector had inflated insurers' back offices. Unlike in manufacturing, these costs could not be easily transferred to the consumer. Insurers must plan many years in advance. Cost increases, whether due to price rises, salary increases, or sharp growth of production can normally only be counteracted by rationalization, not merely by increasing the premium on existing insurance policies.
High growth, little profit
The biggest problem, however, was that claims rose to unsustainable levels. Like many others, Swiss Re reported a loss on its underwriting activities in 1968. Re/insurers were gradually waking up to the fact that their industry thrived not so much on the business of risk, but on the lucrative equity markets. Profits did not rise anywhere as sharply as premium income, and many feared that the re/insurers had developed an over-reliance on investments rather than technical business results for their survival.
Expertise needed: welcome to sigma
The situation was unsustainable, even if investment income more than compensated for technical losses. Pricing models, underwriting practices and loss prevention systems had to improve. Some expertise was available from industry publications and insurance institutes, but much of the information was limited to individual national markets. From the start, sigma chose an international approach and very quickly became the go-to publication series for listings and analysis of different nations' regulatory regimes, market data, business practices, and catastrophe and loss data. Knowledge gained from sigma helped insurers improve their own practices and facilitate business expansion, at home and abroad.
One topic dominated the first two decades of sigma: motor liability. With car ownership becoming more affordable, motor insurance grew exponentially and by 1968, it dominated the non-life sector in most markets. The spread of motor vehicles and compulsory liability protection also became a door opener for insurance to many emerging markets in Asia and Africa.
However, the business of motor insurance was not a money spinner. Deficits in the Third Party Liability line of business were endemic to the industry, and appeared in many re/insurers' annual reports of the 1960s and 1970s (including Swiss Re's). Motor was responsible for the bulk of losses but as the dominant line of business, it was one that insurers could neither afford to stay in nor leave. New and higher premium income was needed to cover old losses, but premium rates were controlled and limited by tariffs imposed by regulators.
Some political quarters called for more state intervention and even nationalisation. But state intervention hardly helped. Cartels, designed to protect primarily the consumers but also the industry, failed as tariffs lagged behind the losses. As sigma stated: "the loss ratio is constantly a jump or two ahead of the income from the obsolete tariff premium."
In 1971, Swiss Re asked its liability expert Walter Diehl (who later became CEO of Swiss Re) to write a detailed evaluation of the motor insurance dilemma for sigma. He identified several issues, not least the motorists themselves, their "aggressive driving" habits and the "growing greed and carelessness of the citizen under advanced capitalism". In 1971, Time Magazine wrote that about 75% of all insurance claims in the US were partly fraudulent. Temptation to profit from punitive damages were high. Barratry was not a new phenomenon but the practices of US tort law turned into windfall gains for both ambulance chasers and insurance policy holders.
New approaches to risk management
Diehl suggested a holistic risk management framework to deal with motor issues, a visionary approach in the days that more losses were held to be good for profits. The experience of losses, it was thought, would spur more people to buy more insurance and with greater demand, premiums rates would also rise. At odds with this wisdom, Diehl instead advocated speed limits, penalties, and safer vehicles to reduce losses. He encouraged insurers to cooperate with emergency response units, to engage in sound actuarial work that would help educate the authorities, and to improve engagement with the public. If insurers fulfilled this "social task", Diehl said, things would get much better in the future.
The problems proved persistent, though. While the industry adapted its practises, change had to come from the authorities as well. In the US, complicated court cases turned car insurance into long tail business with all the associated problems of reserving. Motor liability cases took 17% of the time of American courts, sigma pointed out in a 1972 issue. Cases involving bodily injury took an average of 16 months to settle, compared to cases of burglary that could be handled in about two weeks. Such legal practice upset the business logic of motor insurance. As sigma noted in the same issue:
one dollar of insurance premiums is spent as follows: 21 cents for medical and rehabilitation costs, 30 cents for repairs, and 43 cents for lawyers', courts' and management expenses; the remaining 6 cents have to cover all other costs.
Some states in the US implemented the no-fault system as a solution that did not require proof of negligence. This helped to some degree in the sense that insureds involved in a car accident were indemnified for losses regardless of fault. But, the system also came to be seen as restricting the freedom of insureds to sue for compensation, and some states abandoned the no-fault prctice in the 2000s.
Insurers in Europe struggled with similar issues, for many years. In the early 1970s, there was a first attempt to coordinate motor liability issues across European borders with the so-called green card directive. But it was only in 1990 that the European Commission was able to introduce far-ranging reforms that allowed gradually phasing in freedom of cross-border services in motor insurance. The last sigma about motor insurance -- published in 1991 -- covered this change.
The next 50 years: autonomous cars - who's at fault?
Lately, problems with cars have taken on an additional dimension. The autonomous car challenges liability concepts, road traffic laws, criminal law, and data protection. The reckless driver that sigma featured in its 1971 issue may disappear as cars take over control. But that means laws will have to adapt and define who will be liable and how they can be insured.