Pricing Actuaries Adding Value in a Softening MarketAna Mata, PhD, ACAS

Spring CAE MeetingLondon, 22 May 2008

Matlas Underwriting and Actuarial Consulting, Training and Research

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*BackgroundFocusCommercial P&C insuranceLondon Market businessPre-2001 Who needs actuaries?Few P&C pricing actuaries Mostly reinsuranceMain role individual risk pricing2002 & Post Actuaries as safeguardHigh demand for pricing actuariesToday only 6-7 LM companies no actuaries

The Role of Pricing ActuariesReinsuranceAccount pricingUnderwritingManagement reportingBenchmarking

InsuranceAccount pricingRating modelsManagement reportingOutwards reinsuranceReservingCapital modellingPlanning and Forecasting

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*Would Actuaries Influence Results In This Soft Market?Key Question:Would companies with pricing actuaries do better than those without pricing actuaries?

History yet to proveLast soft marketCOs without actuaries failedCOs with large pricing teams failedWhat could we do different this time?

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*It All Comes Down to Reserves

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*It All Comes Down to Reserves

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*Whos Decision Is It Anyway?

Binding individual risksBenchmarks Rating plansRate monitoringHeld reservesPlan loss ratios

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*Individual Risk PricingCommon actuarial sign off protocolsNo sign offPremium thresholdRisk typeWho has final say?Who should have final say?Proportion of premium pricedWhere are results reflected?

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*Rating Models or Rating Tools?

Increased need for rating toolsEase of workflowAutomated calculationsDocumentationLloyds reporting requirementsRating model actuarial valueRating tool IT value

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*Rating Models or Rating Tools?Goal consistent benchmarkObjective rate monitoringMarket price vs. benchmarkRating databaseLink rating plan to loss ratioDevelop technical rates

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*Renewal Rate MonitoringProcess in place 2002 and postDistinct differenceGood process run by actuariesAccuracy calculated by underwritersWhat is included?Change exposureChange limit / attachmentOther rating factorsSoft issues

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*Renewal Rate Monitoring:The Need for Actuarial AccuracyRate change = -13.06%

Answers = -13% to -27%

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*Renewal Rate MonitoringSoft issuesRisk managementClaims experienceSize discounts if appropriate include in benchmarkTerms and conditionsTrendsUnderstated in hard marketOverstated in soft market

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*Renewal Rate Monitoring

Rate monitoring Highly linked to reserve (in)adequacyMain input for plan loss ratioInclude only objective measuresSoft issuesMarket dependent factorsTreat as rate change

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*New Business Monitoring:The MythWhy is new business rarely monitored?

Going Soft by Stewart Mitchell, The Actuary Magazine, 1/3/2008[...] In practice it is easier to ignore new business because details of the previous years risk may be incomplete. However, new business is typically written on worse terms than renewal business since the business needs to be attracted from the previous insurer, usually by offering a lower price or better terms.

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*New Business MonitoringThe RealityExpiring price is irrelevantMonitor Renewal business to benchmarkNew business to benchmarkNew business rate index

Use new and renewal premium as weights

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*New Business MonitoringConsiderations

New business premium volumeRate change applied to all premiumExtreme case no renewals all new businessRate monitoring 0%ResultSignificant under-reserving

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*Rate Monitoring Considerations

Rate change seen as targetTarget often achievedUnderwriters perceptionsRate increase = goodRate decrease = badNot linked to rate adequacyNot linked to loss experience

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*Rate Monitoring Considerations

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*Rate MonitoringActuarial Value

Take fear out of rate monitoringThink rate adequacyRegular rate reviewsBy industry/classBy territoryBy sizeBusiness strategyProfitable growth

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*Planning and ForecastingPlan 4-6 months before year endDifficult to plan next month!Optimistic assumptionsRecent 3-4 years booked at planCompound effectOptimistic rate monitoringLow pegsNo new business rate index

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*Impact of Plan on Reserves

Further impactActual RC accuracyNew business monitoring

YearPlan RCPlan LRActual RCRevised LR20095%81.5%-7.5%92.5%20105%84.8%-5%93.7%20115%95.2%-5%105%

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*Would Actuaries Influence Results? Time will tellReputational riskPricing role evolvingCome out of the benchAsk questions (lots and lots of questions!)Get involvedValue addedImpact on companys reservesManagement reportsCompany business strategy