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2007 CAS Ratemaking Seminar


Unless otherwise noted, s have been sourced by the presenter. Passion ... communicate to Underwriting rather than being clouded/obfuscated by loss trend ... – PowerPoint PPT presentation

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Title: 2007 CAS Ratemaking Seminar

2007 CAS Ratemaking Seminar
Market Cycle Management Blunt Straightforward
  • Mark Lyons Keynote Address
  • Support Slides

Unless otherwise noted, slides have been sourced
by the presenter
PICC Your Battles
Passion Intuition Courage Credibility
In 2005, Robert Hartwig asked this group Whos
to Blame for Problem Pricing?
  • Actuaries
  • Senior Management of Company
  • Your Underwriting Department
  • Your Marketing Department
  • Regulators
  • POGO We have met the enemy and he is us.

Insurance Cycle Terminology
Thomas Stamm, NAPSLO Collegiate Symposium, April
1, 2006
Strength of Recent Hard Markets by NWP
Growth 2006 to 2010 figures are Insurance
Information Institute forecasts
2005 biggest real drop in premium since early
Better View than Calendar Year Combined Ratios or
Operating Income
Note Shaded areas denote hard market
periods A.M. Best, Insurance Information Institute
Many Sub-Cycles Occurring within ONE Underwriting
Different cycle lengths, different rates of
improvement and deterioration Some lines are
heavily correlated others only slightly
Impact of the Insurance Cycle on Transaction
Variables and Underwriting
  • Soft Market
  • Information ?
  • Coverage ?
  • Pricing ?
  • Attachment Points ?
  • Capacity/Limits ?
  • Underwriting ?
  • Hard Market
  • Information ?
  • Coverage ?
  • Pricing ?
  • Attachment Points ?
  • Capacity/Limits ?
  • Underwriting ?

The Complexity of Comparison Insurers Differ
Strategically on their Approach towards
  • Target Markets
  • Distribution Channels
  • Cross-sell leverage
  • Diversification strategy
  • Rating agencies and regulators
  • Market share versus Margins Philosophy
  • Incentive Compensation
  • Cost structures
  • Use of reinsurance/capital markets
  • Capital management strategy
  • Wall Street quarterly versus longer-term
  • Shareholder expectations
  • Other variables

Top Ten Casualty Actuarial Stories of 2006 (per
February 2007 Actuarial Review)
1 Companies continue to sort out what ERM
means 2 SEC questions reserve
ranges/variability 3 Continued pressure on
audit firms for more critical review of actuarial
work 4 P/C Cat models continue to evolve 5
Use of predictive modeling spreads to smaller
personal lines carriers small commercial
lines 6 Casualty softening market continues 7
Finite reinsurance probes continue 8 Risk
transfer initiatives bifurcation not likely to
pass 9 Federal judge rules that flood
exclusions do not apply to 2005 levee breaks 10
Hard market for property cat risks driven by
changes in pricing models and capital
requirements creates alternative capacity (cat
bonds side cars)
1 - Back end 2 - Back end 3 - Back end 4 -
Both 5 - Both mostly internal 6 - Front end 7 -
Back end 8 - Back end 9 - Front end (full
circle) partial impact though 10 - Both mostly
Executive Assurance Proxy Other Liability
Claims Made Combined Ratios and ROE
Source Industry Annual Statements, Schedule P
and Bernstein Research, August 2006
Tillinghast Annual Price/Limit Indices DO
Tillinghast Implied Price Per Million Changes DO
Marketplace EA Competitor Results
Source Competitor Group 2005 Annual Statements
Schedule P
Marketplace 6 EA Competitor Summary
  • Underwriting DOES matter
  • NONE of above Competitors would have made a 15
    ROE from 1999 2002!
  • Redefine SUCCESS

PICC Your Battles
Passion Intuition Courage Credibility
Make decisions! Make a difference! Be counted
on to be a valuable contributor! Variability
is extremely important but you need to be in the
shoes of the underwriter align with time
pressures wide ranges provide little value
Follow up with UW to see what happened to the
quote show you care, are part of the team
deserve to be notified Meet w/UW managers
supervisors to get a better feel and varying
Examples of Business Value Added PASSION,
LOB Actuaries
Read actual policy files stay late learning
doesnt stop when the exams are completed
Insist on a full underwriting submission NOT
JUST LOSS EXPERIENCE Dont get brokered by
an underwriter as to the information supplied
Know what stage of the Underwriting Cycle this
Profit Center is in Be Universal Translators
(for the Star Trek fans in the audience)
Transaction LOB Actuaries (Continued)
Actuarial Managers/Actuarial Executives
Insist that your actuaries develop critical
business skills Minimize not my job
syndrome Consider putting your staff physically
with UW units Get involved in Risk Management
endeavors Where appropriate set up cross views
by Business Division and Product within Actuarial
Reserving Actuaries need to meet with UW as
well dont shut them off and only have Pricing
Actuaries communicate
Actuarial Managers/Actuarial Executives
  • Adopt effective Meeting Management behaviors
    that support cycle management
  • Managers need to provide referral points and
    escalation points to their actuarial staff no
    different than underwriting units do
  • Its important to begin soft market management
    at the transaction level being flexible on
    marginal deals and being strong and forceful on
    unprofitable deals. Your line actuaries need to
    know that they have your support if and when this
    is escalated over their heads to you.
  • Dont become solely the Premium Prevention

Actuarial Executives/Chief Actuaries
  • Stand up and be counted THIS IS MOSTLY A
    stop. The buck stops here!
  • Need to maintain professional distance
  • Important to identify with management rather than
    your employees you ARE management
  • Seek out Business Unit executives who themselves
    are (were) actuaries
  • One key objective of the Chief Actuary in a
    soft market should be to become UNPOPULAR

Actuarial Executives/Chief Actuaries (Continued)
Need to alert Senior Management,
quantitatively, just how profitable and
unprofitable the subject lines of business have
been historically over all points of the Cycle
Other Liability - Combined Ratios
Average Combined Ratio 1995-2005 116.1
A.M. Best Insurance Information Institute
Marketplace Casualty Competitor Results as of
December 31, 2005
Source Competitor Group 2005 Annual Statements
Schedule P
  • Paradoxes
  • All companies have the best underwriters in the
  • All companies are better than average
  • The cycle will swing back
  • Insurers results will deteriorate
  • Underwriting makes a difference

Excess Liability Market Capacity in Billions
Capacity dropped 30 from 2000 to 2003 but has
since increased by 10.2
2005 Limits of Liability Report, Marsh, Inc.
Marketplace XS Casualty Industry Historical
Known Loss/ALAE Ratios
Hard Market
Hard Market
Arch, November 2, 2006
Actuarial Executives/Chief Actuaries (Continued)
  • Set up a clear basis with Senior Management (of
    which YOU are a part) as to how the business will
    be routinely viewed
  • Set up a clear set of analytics with Senior
    Management that leverages this data organization

Actuarial Executives/Chief Actuaries (Continued)
  • Risk Selection - Hit Ratios
  • Price Monitors
  • Renewal Retention
  • Commission Rates
  • New / Renewal Business Mix
  • Admitted / Non-Admitted Mix
  • Loss Trends
  • Terms and Conditions
  • Changes in Portfolio Mix
  • Returns of the Business
  • Update Returns Quarterly RETROSPECTIVELY AND
    YEARS. Communicate graphically!

Leading Indicators Risk Selection
Hit Ratios Need to be viewed as a time series
best if done on a Policy Quarter basis (not
Calendar Quarter) Also meshes with other Leading
Indicators data organization Critical to be
done separately for New versus Renewal
Business Renewal business should have higher
hit ratios gtNew business, in a softening
market, will be where most deterioration
lives gtNew business will be bought either by
price, TC, expanded capacity, lower attachment
points, expanded services, higher
commissions Critical since most carriers measure
renewal rate change only underwriters know
this drive new business knowing that the
measurements are delayed until first renewal
masks true state
Leading Indicators Risk Selection (Continued)
  • Quoted to Submitted triage, risk appetite
    validation, deemed attractive enough to quote
    can be indicative of changing risk selection
    standards, changing marketplace messages, better
    producer management efforts
  • Bound to Quoted success rate given that it
    was quoted can show changing pressures in the
  • Bound to Submitted the product of the above
    two ultimate measure of success-to-activity can
    be a masked result similar to a pure premium
    trend versus that of frequency and severity
  • Sheer volumes of submission, quote, binder
  • Staffing models
  • Verification of Risk Appetite messages to
  • Been largely ignored by actuaries too

Leading Indicators Price Monitors
  • Needs to be a continually updated time series
  • Need for Renewal business and New business for
    all material sectors of the book
  • Renewal business (from basic to sophisticated)
  • Average Policy Premium
  • Price Per Million (PPM)
  • Price per unit of exposure
  • Effective Rate Change
  • Exposure, policy term, limits, attachment/deductib
    les, layer
  • Coverage mix changes, endorsement grants, defense
  • Acknowledgement that some products cannot be
    accurately measured
  • Compare apples to apples with normalized and
    explain any differences
  • Know how much of the renewal book the monitors
  • Consider giving field underwriters online tools
    so they can more effectively choose between
    alternatives AND not get disadvantaged by brokers
    asking for multiple quote options

Leading Indicators Price Monitors (Continued)
  • Important to have multiple measures both
    internally and externally produced (these are
    Renewal oriented)
  • CIAB view of the producers via survey
  • Tillinghast view of the carriers via defined
  • Advisen / RIMS view of the customers via survey
  • Marketscout view of a producer aggregator via
    data and survey
  • Know their gathering and sampling approaches
  • Reconcile external indications with internal
  • Use as probe with underwriting units

Leading Indicators Price Monitors (Continued)
  • New Business (from basic to sophisticated)
  • Expiring pricing/terms are suspect and not easily
    verified or subject to audit
  • Price per unit of exposure
  • PPM
  • New business relative to Renewal business in
    defined clusters
  • Establish benchmarks from bureau information,
    company manual rates, loss rating indications,
    credibility weighted theoretically sound but
    practically difficult
  • Need to maintain BOTH premium change monitors
    effective rate change monitors

MarketScout Commercial Price Report
Average Premium Trend by Line of Business
Average Commercial Rate Change by Line - CIAB
Commercial accounts trended downward from early
2004 to mid-2005 though that trend moderated
Council of Insurance Agents Brokers
Marketplace CIAB DO Insights (EA)
Leading Indicators Renewal Retention
  • Key component of ongoing profitability
  • More familiarity with renewal accounts
  • Cheaper to secure since most effort expended on
    gaining the account originally as New Business
  • Should be viewed on both a Renewal Premium basis
    and a Renewal Count basis
  • Be mindful of the Count mechanism policy or
    Account based policy retention can drop with
    Account retention staying flat due to changing
    layers or policies per Account consistency is
    the key
  • Further retention views by Renewal Loss Ratio
    can help in ascertaining whether the Renewal LR
    will be lower than the New Business LR
  • Can aid in commission strategy as softening
    market puts pressure on commissions

Leading Indicators New /Renewal Mix
  • Fundamental that New Business and Renewal
    business should conceptually have the same
    Ultimate Loss Ratios (ULR) at ONLY the apex or
    nadir of that products cycle
  • Softening Markets New Business should have
    higher LRs than renewals
  • Hardening Markets New Business should have
    lower LRs than renewals
  • Knowing the New/Renewal mix is critical for
    profitability, reserving, and operating action
  • Can aid in determining strategy beyond
    continuing to hit Plan or overall grow/shrink
  • Helps with relative mixture of New / Renewal
    growth or de-celeration year-by-year SEPARATELY
    for new versus renewal
  • Demonstrated metrics and management here also
    permits more flexible and creative reinsurance

INSURANCE OPERATIONS Market Cycle Management
Graph of Economic Return by Policy Year (and
Policy Quarter)
N P V or R O E
Maximize Writings
Maximize Writings
Policy Years
Graph projections driven by estimated rate
changes, loss cost trends, other leading
Leading Indicators Commissions
  • Commission Rates
  • Can be used within an overall economic review or
    can be integrated as part of the price monitor
    process either way is fine as long as
    consistency is maintained and definitions are
  • Reflects the changing impact of the net true
    cash received perspective
  • Producers attempt to increase commission rates at
    the worst possible time for insurers in order to
    keep THEIR top line growth flat
  • Insurers then feel the double whammy of lower
    prices increased net of producers
  • On the other side, Ceded side, pay attention to
    whether facultative cessions are being bound and
    coded net of ceding commission big effect on
    ceded LRs

Leading Indicators Admitted/Non-Admitted
  • Admitted/Non-Admitted Mix
  • Comes down to who is responsible for collecting
    and submitting associated taxes
  • Admitted needs to be charged within the quoted
    premium and remitted to authorities by insurer
  • Non-Admitted is not charged within quoted
    premium and is collected and remitted to
    authorities by the Surplus Lines broker
  • Generally speaking, this is about a 3 rate cut,
    all else being equal, when renewing from a
    non-admitted basis to an admitted basis

Leading Indicators Loss Trends
  • Frequency
  • Severity
  • Pure Premium
  • Reconcile internal versus external data
  • Primary versus Leveraged Excess Trend
  • Important to communicate the incremental ground
    that is being lost each quarter
  • Again, can be included as part of the effective
    rate change or instead be within an overall
    economic analysis
  • I prefer loss trend to be OUTSIDE the effective
    rate change calculation this is more
    straightforward to communicate to Underwriting
    rather than being clouded/obfuscated by loss

(No Transcript)
Leading Indicators Change in Portfolio Mix
Can indicate where your Business Units are
having increased success and having trouble
Its our managements job to determine whether
we should push down the gas accelerator on some
LOBs and hit the brakes on others Reductions
in some LOBs may be more a function of services
(Claims, premium audit issues, deductible issues,
collateral issues, risk engineering issues) and
may not necessarily imply a market below Return
thresholds Forces another review of whether
the emerging mix of business meeting economic and
strategic objectives Can alter your view of
net retentions, reinsurance programs, upfront
capacity usage, attachment points, and the extent
of services rendered
Leading Indicators Returns of the Business
  • NPV Margin present value profit/loss of
    present value premiums
  • ROE same as NPV but related to allocated equity
    and includes interest income from equity
  • ROC same as ROE but related to all capital
    allocated (eqty, debt, hybid)
  • All three can co-exist but one needs to govern
  • Best done on an UW Year or Policy Year basis
    (i.e. Decision Year) cleanest implementation
    and communication approach
  • Accident Year cant DIRECTLY relate to UW action
  • Call for all insurers measures to reflect
    risk-free interest rates ONLY to stall any
    desires for cash flow underwriting (even capped
    rates if Treasuries go uncharacteristically high
    due to inflation)

Leading Indicators Returns of the Business
  • Senior Executive decision-making and
    communication can be separate from communication
    necessary for line-of-sight execution
  • Demand sophisticated Senior Management views for
    broad decision-making
  • Demand simpler Product Line and Region/Office
    goals, standards, and thresholds
  • Speak in clear traditional line of sight
    language rate change, premium change, loss
    ratio, combined ratio

Leading Indicators Returns of the Business
  • Extend the return measures reasonably into the
    future by Policy QTR
  • Lets you see WHEN established return thresholds
    may be pierced creates another measure for
    meetings and action TIME
  • Update these reviews quarterly as Leading
    Indicator information marketplace dynamics are
    clearer make expense, reinsurance and capital
    management assumptions

(No Transcript)
Discussion of Priority Order of Individual Risk
Softening Market Impacts
1st - Risk Selection 2nd - Terms and
Conditions 3rd - Attachment Points and Capacity
Usage 4th Price What??? Have you lost your
mind??? Measure each Risk Selection weve
discussed 1st above Pricing weve discussed
4th above Attachment Points Capacity Usage
next slide Terms and Conditions next slide
Can be others
Discussion of Priority Order of Individual Risk
Softening Market Impacts (Continued)
  • Attachment Points/Capacity (Limits) weve only
    implicitly discussed these within the effective
    rate change calculation
  • Needs a quarterly portfolio monitoring
  • Shifts of capacity upward can get lost if only
    reflected within effective rate change
  • The appearance of effective rate change
    trade-offs when higher limits are provided is
    where the ILF curves are weakest (i.e. bigger
    blocks at higher attachment points)
  • Allows explicit questions to be put to
    underwriting executives
  • Important to know if XOL treaties are being
    utilized as intended
  • Underwriters often drop attachment points to
    ensure that their premium goals are met (i.e.
    close your eyes and pray for miracles)
  • If the measurement is for deductibles rather than
    attachment points, a measure of portfolio credit
    risk needs to be made as well

Discussion of Priority Order of Individual Risk
Softening Market Impacts (Continued)
  • Terms and Conditions this represent coverage
    changes whether granted by form or endorsement
    extremely hard to measure
  • Recommend isolating KEY coverage areas and
    monitoring frequency of use
  • Can be accomplished via sampling, automated
    binder issuance or policy issuance systems,
    reinsurer audit reports
  • Participate on Corporate UW audits and/or read
    their reports
  • Need to involve the Claims department and develop
    approximate Loss Ratio impacts of these key
    coverage grants or retractions
  • Some measure should be included even if a SWAG
    no mere clarifying footnote will overcome the
    lack of inclusion of form deterioration in
    projected LRs

Market Cycle Responsibilities of Senior/Executive
  • Clear communication of WHAT CONSTITUTES SUCCESS
  • Repeatedly communicate to the Company at large
    the importance of Cycle Management and that of
    Margins over Top Line Revenue
  • Make Market Cycle Management a key component of
    UW Executive Performance Objectives
  • Align Incentive Compensation directly with
    Underwriting return measures
  • Corporately highlight and encourage both ends of
    the spectrum Home Run Deals AND Golden Glove
    plays must be true to the culture and behavior

Market Cycle Responsibilities of Senior/Executive
  • Demonstrate action and not just words
    communicate this alignment
  • Make the difficult decisions that were paid to
  • Look for new markets, new methods of
    distribution, and new innovative products
  • Develop tools for both seasoned and young
    underwriters to manage the Cycle
  • Influence the structure of Board Committees

Additional Feedback Loops about the Market Cycle
  • Reinsurer Audit Reports
  • Reinsurance Market approach to treaty renewals
    and facultative support
  • Requested changes to UW aspects of IT systems
  • Frequency of binder halts on approved u/w
  • Risk Management Reports
  • Monthly Executive Reports and Calls
  • Profit Center Executives
  • Regional Executives
  • Scheduled Business Reviews / Profitability
    Reviews of all major UW units
  • Business Unit UW Audits
  • Corporate UW Audits
  • Changes in UW Authority Delegation or UW referral
  • Internal Audit Reports
  • Claims Audits / TPA Audits
  • Claims Large Loss Cause of Loss Meetings
  • Trade magazines and studies

(No Transcript)
Other Career Options for Actuaries
  • Actuaries are fundamentally qualified for many
    functions within an insurance enterprise BUT
    learning never stops
  • Caution
  • May only see the 1/9th of the iceberg above
    the water
  • Underwriters are sometimes accused of having
    just enough understanding of actuarial
    principles to be dangerous --- we dont want
    to be accused of the same thing
  • Can be difficult to break into these other areas
    without either a Management Rotational Program or
    a mentor who helps guide you there

Other Career Options for Actuaries (Continued)
  • Recommend collectively sitting down with your
    boss, H/R, and the target functional executive
    to plot a course towards achieving your goals
    may involve additional coursework and/or shifting
    from your current comfort zone perhaps some
    units would accept a transitioning
  • You CAN make it work
  • It may involve a reality check. For example,
    while you were passing exams, underwriting staff
    with the same years of experience you possess
    have been accumulating significant experience,
    trial-by-error knowledge, and possess many
    business contacts that are critical and difficult
    to amass quickly. Expect to Pay Your Dues!

Other Career Options for Actuaries (Continued)
Innovation / Alternative Markets / Capital
Markets Chief Financial Officer Chief
Information Officer Chief Underwriting
Officer Chief Ceded Reinsurance Officer
Enterprise Risk Management Officer Chief Risk
Officer Business Unit Executive Chief
Operating Officer President and/or Chief
Executive Officer
PICC Your Battles
Passion Intuition Courage Credibility
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