Double post again. :(

Dread, very informative post, thank you. But the question is should AIG be cheaply stumping the Forces for this risk or could they not quite easily load a couple of pence onto all policies without becoming un-competitive?

I know that they have risks and need to make profits etc, but it still hurts when my premiums go up 25% in a single leap!

They could do. However the person who did would promptly be sacked at the next shareholder meeting.

AIG are answerable to their shareholders, to whom they have a legal obligation to return a profitable return on investment.

The government could choose to launch a fund whereby soldiers buy units (same as PAX), and the government on the day decides how much each unit should cost and the limit on recompense, and then fund the entity so that it remains liquid. But they won't.

You're right, they won't. They're too busy spending our money bailing out a failing bank!

Some overlap with Dreads post, but I have spent some time trying to simplify a very complex issue, so I will post it anyway!

Ok, here we go…..

Have you ever heard of the phrase “If you owe the bank £1,000 it is your problem; if you owe them £1,000,000,000 it is theirs”? That is the principle underlying the nationalisation of Northern Rock, and also the PAX / World Trade Centre comparison.

When a book of insurance business is suffering from losses greater than the premium income, then insurers must act to bring it back onto a profit making basis. Where it is on one specific account, and the rest of the portfolio is running OK, then that account is the one which must bear the additional costs.

Where the losses are so catastrophic that it is impossible for the increases in premiums to be borne by the effected accounts alone, then the cost is levied across the whole portfolio.

We know that PAX have declared losses which have wiped out the last 10 years of profits. These losses are probably measured in millions or possibly even tens of millions of pounds. Whilst these are significant amounts to you and me, they are not deemed catastrophic for insurance industry purposes. Therefore, they need to be recouped from the risks in question.

To give a comparison, a particular Syndicate in Lloyd’s of London was writing a $30,000,000 account of personal accident business. This means that they accepted $30m of premiums from clients, and could realistically have expected to make between 12% - 15% of profit (before salaries, costs, expenses etc) on that income (say $4.5m per year). That particular syndicate suffered $350,000,000 of personal accident losses from the World Trade Centre alone. The London insurance market accepts around £500,000,000 of premium income from personal accident business, so as the worst case scenario you could extrapolate that loss out to £5,833,000,000 of WTC losses!

There is no way that they could have attempted to recoup those losses from the various contracts which suffered losses without spreading the “debt” over hundreds of years, so it was levied across the whole industry. It will still take decades to recoup the overall industry losses.

Whilst the people who deal with PAX on a day to day basis have great sympathy for the armed forces, to the owners of AIG, this is just one small account, and it must have a chance of supporting itself if it is to continue.

Duke, thank you. At last a post I can understand. On that note I'll be shopping around for new Personal Accident Insurance. Just quickly looked at a quote from one of the site sponsors and I can get pretty much the same cover for the price I was paying before, therefore saving the hike!

Thanks again, you made it quite easy to understand!

Originally Posted by dingerr

Originally Posted by The_Duke

Themonstar, the letter says that they may consider cover for PTSD. When an insurance company has been hit as hard as they have on this scheme, they tend to want to get things under control, not extend coverage even further.

How can insurance companies quantify PTSD? I'm not aware of any Insurance company that provides cover for mental illnesses. Further to that, the genuine PTSD sufferers will experience further difficulties due to cheats jumping on the PTSD band wagon in order to make a claim.

Although the civil courts do manage to quantify PTSD in personal injury cases. Employer's liability insurance cover includes PTSD.

Originally Posted by hackle

Originally Posted by dingerr

Originally Posted by The_Duke

Themonstar, the letter says that they may consider cover for PTSD. When an insurance company has been hit as hard as they have on this scheme, they tend to want to get things under control, not extend coverage even further.

How can insurance companies quantify PTSD? I'm not aware of any Insurance company that provides cover for mental illnesses. Further to that, the genuine PTSD sufferers will experience further difficulties due to cheats jumping on the PTSD band wagon in order to make a claim.

Although the civil courts do manage to quantify PTSD in personal injury cases. Employer's liability insurance cover includes PTSD.

We have been around this issue before. PTSD can be insured - but it costs! It will not be put in for free, because the additional claims arising from it have to be paid for.

Originally Posted by The_Duke

Originally Posted by hackle

Originally Posted by dingerr

Originally Posted by The_Duke

Themonstar, the letter says that they may consider cover for PTSD. When an insurance company has been hit as hard as they have on this scheme, they tend to want to get things under control, not extend coverage even further.

How can insurance companies quantify PTSD? I'm not aware of any Insurance company that provides cover for mental illnesses. Further to that, the genuine PTSD sufferers will experience further difficulties due to cheats jumping on the PTSD band wagon in order to make a claim.

Although the civil courts do manage to quantify PTSD in personal injury cases. Employer's liability insurance cover includes PTSD.

We have been around this issue before. PTSD can be insured - but it costs! It will not be put in for free, because the additional claims arising from it have to be paid for.

Interesting though that (according to the MoD letter) the inclusion of PTSD in the PAX scheme was actually being considered in October 2007, when the losses of the scheme were already known. In fairness to PAX, they HAVE introduced other extensions to the cover (bot not PTSD) at the same time as the premium hike.

Just for fun, lets play at being an actuary (those dull autistic people who do the maths behind your premiums).

Assume everyone who buys PAX gets 15 units. It would have cost each person 45 GBP per month. Assume also that they do what most soldiers do: only have PAX while deployed on operations. This would have brought in a total annual income of 26.7million GBP. Problem is that many soldiers don't have pax, so reduce that figure by 40% =16 million per year in premiums.

Though I had trouble getting precise figures on casualties, and know nothing about modern PAX (I last had it in 2001 when I left the Army), I used the following figures:

Iraq: 174 Dead, 8,000 Injured.
Afghanistan: 91 Dead, 2,000 Injured.

Assume 15 Units of Pax per person gives out 100,000GBP on death, and an average of 5,000GBP per injury (obviously some would get far more, others far less).

This would result in PAX having paid out: 76.5 million in claims to date (versus 16million annual income). PAX has administration costs (brokerage, office, reinsurance, etc) that probably take up 25-30% of the premium. When the loss ratio (money going out opposed to money coming in) is as bad as it is currently, then the premium must rise.

IIRC PAX are going to try and make people buy their units for 12 month periods to stabilise their income stream (you can tell I am a consultant). I suspect that more will need to be done i.e. it will become compulsory on deployment for all personnel, with a reduced rate (e.g. 30% discount) while back in camp.

I cannot see AIG maintaining the current low price of PAX without government intervention or funding.