European Operations business review

European Operations delivered a very good underwriting result considering the high level of catastrophe and large risk claims, combined with the longstanding depressed trading conditions in many areas of the business.

Richard Pryce
Chief Executive Officer   •   European Operations

Gross written
premium (US$M)


1% from 2016 1
Net earned
premium (US$M)


3% from 2016 2,3
result 4 (US$M)


7% from 2016 3
profit 4 (US$M)


7% from 2016 3
operating ratio 5

95.2% 4

2016 90.7% 3
profit margin

10.4% 4

2016 10.1% 3
  1. Up 0.4% on a constant currency basis.
  2. Up 4% on a constant currency basis.
  3. Adjusted for transactions to reinsure UK liabilities.
  4. Excludes a $141 million one-off adverse impact on the underwriting result due to the Ogden decision in the UK.
  5. Combined operating ratio adjusted to exclude the impact of changes in risk-free rates used to discount net outstanding claims.

2017 Overview

As reported at the half year, trading conditions continued to moderate and, consequently, we recorded a further average renewal rate reduction of 1.1% compared with a reduction of 2.4% in the prior year. Adjusting for the change in the discount rate on UK personal injury claims (the Ogden decision) the average rate decline in 2017 was 0.2%.

Since the catastrophe activity in the second half, we have witnessed improved pricing and terms and conditions in some areas of the business, most notably US property classes (insurance and reinsurance) with critical catastrophe exposures. Regardless of the class, our underwriting teams are committed to repricing business that is either loss affected or poorly performing. We are determined to display professional and proportionate leadership to produce the required level of return.

Following the consultation announced in February, the UK Government has committed to change the way in which personal injury compensation awards are calculated. Whilst we are still waiting for the draft legislation, there are clear indications that the rate will be set between 0% and 1%. In anticipation of this, we have adjusted the central estimate rate assumption to 0.25% which resulted in a slightly reduced adverse financial impact of $141 million for the full year compared with the $156 million impact recorded at the half year.

Brexit plans remain challenging but on track. Having announced our intention to establish a new Belgian-based insurer and reinsurer in June, we submitted our formal application to the National Bank of Belgium in October and remain committed to having the new company operational in the final quarter of 2018.

As ever we remain focused on our customer engagement activities across underwriting, claims and risk management and this discipline is being evidenced by our new business success.

Our data and analytics capability developed significantly during 2017, and is now creating value through claims ratio improvement. We have increased our focus on underwriting projects to complement our more established claims activities, including our recently announced and exciting partnership with Cytora (an artificial intelligence company providing insurance solutions) that will further enhance our underwriting capability in 2018 through initiatives aimed at enhancing risk identification and selection. In addition, we continue to monitor numerous Insurtech initiatives that may reshape aspects of the industry in the coming years.

Operating and financial performance

Underwriting performance

Following indications from the UK Ministry of Justice, we have reassessed the UK bodily injury discount rate (the Ogden decision) to 0.25%, compared with the -0.75% announced in February and used in the determination of our half year results.

The 2017 and 2016 profits in the table below are presented on an adjusted basis after excluding the estimated impact of Ogden and the transactions undertaken to reinsure UK long-tail liabilities in 2016. Unless otherwise stated, the profit and loss and underwriting commentary following refers to the results on this basis.

Excluding the beneficial impact of higher risk-free rates used to discount net outstanding claims, the combined operating ratio increased to 95.2% from 90.7% in the prior year, primarily reflecting a reduced level of positive prior accident year claims development coupled with increased catastrophe experience.

Positive prior accident year claims development reduced to $141 million from $273 million in the prior year. We experienced adverse prior accident year claims development in the financial lines portfolio which, combined with one‑off US long-tail liability deterioration and the impact of adjusting the periodic payment order rate to 0.25% during the second half, contributed to reduced overall positive prior accident year claims development.

Our longstanding commitment to underwriting discipline and prudent exposure management has been tested more than ever during the last 12 months of heightened catastrophe activity and it is pleasing to record a relatively modest financial impact due to these events.

Insurance profit for the year was $335 million, up 7% from $314 million in the prior year with the insurance profit margin increasing slightly to 10.4% from 10.1% previously.

Gross written premium and net earned premium (US$M)
Gross written premium and net earned premium

Combined operating ratio (COR) and insurance (loss) profit margin (IPM) (%)



Combined operating ratio

Underwriting result

2017 2017 1
2016 2016 2
2015 2014 3
Gross written premium US$M 4,049 4,049 4,076 4,076 4,386 4,526 5,236
Gross earned premium US$M 4,010 4,010 3,878 3,878 4,338 4,805 5,146
Net earned premium US$M 3,210 3,212 2,949 3,115 3,454 3,929 4,160
Net incurred claims US$M 2,024 1,885 1,658 1,826 1,844 2,362 2,486
Net commission US$M 615 615 574 574 634 718 768
Expenses US$M 499 499 516 516 599 626 646
Underwriting result US$M 72 213 201 199 377 223 260
Net claims ratio % 63.1 58.7 56.2 58.6 53.4 60.1 59.7
Net commission ratio % 19.2 19.2 19.4 18.4 18.4 18.3 18.5
Expense ratio % 15.5 15.5 17.5 16.6 17.3 15.9 15.5
Combined operating ratio % 97.8 93.4 93.2 93.6 89.1 94.3 93.7
Adjusted combined operating ratio 4 % 99.6 95.2 90.2 90.7 89.7 88.8
Insurance (loss) profit margin % 6.0 10.4 10.7 10.1 13.4 8.8 9.0
  1. Excludes a $141 million one-off adverse impact on the underwriting result due to the Ogden decision in the UK.
  2. Adjusted for transactions to reinsure UK liabilities.
  3. Adjusted for transactions to reinsure Italian and Spanish medical malpractice liabilities.
  4. Combined operating ratio adjusted to exclude the impact of changes in risk-free rates used to discount net outstanding claims. Management-basis results were not reported in 2013.

Premium income

Headline gross written premium fell by less than 1% to $4,049 million from $4,076 million in the prior year but is up 0.4% on a constant currency basis. Pleasingly, areas targeted for premium growth such as short-term life reinsurance in QBE Re and primary property and casualty insurance in Continental Europe continued their growth trajectory.

Our customer commitment activities helped to deliver slightly improved policy retention levels despite intense competition. In response to deteriorating market conditions, new business volumes were lower than the prior year but more than planned.

Net earned premium grew 3% to $3,212 million from $3,115 million in the prior year but was up 4% on constant currency basis.

Gross earned premium by class of business
Gross written premium

Claims expense

The net claims ratio of 58.7% was broadly unchanged from the prior year.

The net claims ratio benefited from positive prior accident year claims development of $141 million or 4.4% of net earned premium, a reduction from $273 million or 8.8% in the prior year.

European Operations’ attritional claims ratio increased to 49.6% from 48.5% in the prior year. The year-on-year deterioration reflects higher underlying attritional claims activity in short-tail classes as well as business mix changes coupled with temporary impacts including the Ogden decision, additional one-off reinsurance expense and the earn-out of unearned premium impacted by the post-Brexit collapse in sterling. We have commenced adjustments to the property portfolio to reverse this trend.

As expected, the attritional claims ratio improved materially during the second half as the post-Brexit foreign exchange impact on unearned premium earned out during the first half.

Despite the significant large individual risk and catastrophe claims activity during the year, the net cost remained within our planned allowances.

Higher risk-free rates used to discount net outstanding claims liabilities benefited the underwriting result by $57 million or 1.8% of net earned premium compared with an adverse impact of $89 million or 2.9% in the prior year.

Commission and expenses

The net commission ratio increased to 19.2% from 18.4% in the prior year, reflecting ongoing commission pressure in the London market insurance operations. Additional one-off reinsurance costs accounted for a further 0.3% of the increase.

The expense ratio improved again to 15.5% from 16.6% in the prior year, due to strict cost control coupled with modest net earned premium growth.


Whilst the pricing outlook for 2018 is marginally more positive for most portfolios, we have not yet seen the significant shift in premium rates predicted by many after the exceptional 2017 catastrophe activity. It seems that any meaningful pricing correction will be for loss impacted insurance lines and will be less pronounced for QBE Re than anticipated.

Regardless of the market conditions, we remain committed to disciplined pricing and prudent risk selection across the entire portfolio. Moreover, we will be mindful of the cost of distribution, particularly for London Market business.

Delivering a sustainable Brexit solution remains a priority for the leadership team during 2018. As we cannot be certain of an acceptable political outcome, we plan to have our new European company established and trading in time for 2019 renewals.

Elsewhere, we will ensure that we are closely aligned and engaged with our customers in all areas, especially in this time of heightened industry uncertainty. We aim to be active and visible across the industry in all our key geographies. Our extended distribution network will be more valuable than ever as we seek to secure quality new business and mitigate the increasing costs of conducting business in the London market.

Finally, we expect to see more positive progress from our data science activities in both underwriting and claims management which will both improve customer experience and benefit our margin.