ML01 SURVIVING THE GLOBAL FINANCIAL CRISIS: THE OUTLOOK IS DISTURBING FOR MEDICAL INDEMNITY

The world is faced with a recession. We can see three disturbing trends: (1) Insurers expect an increase in the number and size of claims, particularly in insurance, such as MI. (2) Investment returns will be lower as a result of lower interest rates and weaker equity markets. (3) All companies face reduced access to funding, as lenders become more reluctant to lend money. To survive these forces, insurers need to be well capitalised and to have effective risk and governance practices in place. No insurers will be immune to the adverse trends listed above. There are some specific issues facing MI insurers: (1) There is emerging evidence that the tort law reforms in MI are being watered down in interpretation, which would cause medical indemnity claims to increase rather than decrease in the future. (2) MI claims are long‐tail in nature, so it is critical that the insurer is strong enough that it will still be around when the claims need to be settled. (3) Because MI claims can be very large, it is important that the MI insurer holds adequate reinsurance, which is the principal way that insurers spread the risk that they take on. By their very nature, insurers are risk takers. However, risk must be properly managed. A good risk management approach forms a useful checklist for anyone seeking review of their insurer: (1) Active and effective underwriting ensures that an appropriate premium is charged for the risk being underwritten. (2) Use of pre‐eminent reinsurers ensures that policyholders can be confident that their claims can be paid. A low‐risk, absolute‐return investment strategy, with minimal exposure to equities, avoids adding risks. 3A strong track record and a listing on the ASX make it easier to raise further capital if so required.