Back to the Future: Predictability, Pricing and Forecasting in the Marine Insurance Industry

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Back to the FuturePredictability, Pricing and
Forecasting in the Marine Insurance Industry

• Tom Midttun
• Senior Vice President, Gard Services, Norway

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Back to the Future Universal Studios
1985 Starring Michael J. Fox and Christopher
Lloyd.
The future for teenager Marty McFly is not
shaping up well. His family is dysfunctional, his
schoolteacher, Mr. Strickland, is out to get him,
his music is too loud and the rest of the world
doesnt care.
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Where is the industry heading?
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...the consequences thereof...
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2000
Loss Ratio
Index
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Back to the Future consequences of entering
the future backwards
Present industry standards

• Majority of uw-decison based on 4 years
  statistics.
• Un-indexed / savings account approach.
• No benchmarking / relative picture.
• No experience databases.
• Little interest in loss causation / little focus
  on operations.
• Todays rate
• Good shipowner gives profit / Bad does not.
• No real participation.

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Back to the Future consequences of entering
the future backwards
Present industry standards

• Reasonable price differentiation in peak market
• Too much of the time uwrs enable cross
  subsidisation from quality to substandard owners

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Price Differentiation, Quality Rewards Chain of
Responsibility
Do Underwriters really care?

• Marine Hull Product notorious weak performer.
• Trading the reinsurance markets historically
  more important to profitability.
• Volatility creates opportunity!
• Traders vs Chain of Responsibility

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Back to the Future consequences of entering
the future backwards
Investors experience
Lloyds 1998 year various forecasts
Loss GBP mill
A bit like asking turkeys if they are looking
forward to Christmas.
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Lloyds marine loss ratios (incurred) per
underwriting year at 1st half 2000
Investors experience
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Back to the Future the proper use of
statistics

• Target industry standards

• Proper analysis of up to date figures
• Underwriting decision support systems
• Consideration of all factors relevant for
  customer economics calculation
• Logical / fair approach to casualty composition

• Ability to simulate future risk / loss scenarios
• Actuarial model taking into account IBNR/RBNS
  factors as well as fleet composition norms
• Simulations covering alterations in retention
  and/or coverage

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FORWARD to the Future focusing on more
relevant risk factors

• Loss Causation
• Quality Management Control
• Commercial Operations Earnings
• Technical Operations
• Crew Standard Training
• Design of Vessel
• Condition of the Vessel

Majority of underwriters globally do not have the
resources nor competence to carry out.
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FORWARD to the Future delivering products
mitigating owners risks

• Loss Prevention Services
• Methodologies aimed at understanding ultimate
  incidence causation
• Price stabilisation in return for quality
  commitments
• Focus on revenue, the owners role in his clients
  business the full range of risks to which his
  business is exposed...

Majority of underwriters globally do not have the
resources nor competence to carry out.
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The Future delivering the most-efficient
risk financing
What is the right rate and how is it determined?
Ah that is an underwriting secret, the essence
of the underwriters art.
A vehicle geared to delivering efficiency in the
financing of risk over time should enable a
buyer, quite straightforwardly, to determine for
himself the right rate for the financing of his
risk
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...and as the market now hardens.... IT MAY WELL
BE...
...FORWARD TO THE PAST...?!