Tools for the Soft Market

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Tools for the Soft Market
Tom Duffy
Midwest Actuarial Forum September 23, 2004
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Companies Should Prepare Now For Market Changes

• Many Companies Have Enjoyed Benefits of Stronger
  Pricing Over Past Three Years
• Price Changes Have Masked Failures by Many
  Companies to Address Fundamental Operational
  Issues
• Market Changes Will Test Companies in Meeting ROE
  Requirements
• Shareholders and Directors Will Hold Management
  to High Levels of Performance

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Where Can Actuaries Make A Difference?

• Forecasting and Strategic Plans
• Developing Appropriate Pricing Targets, Pricing
  and Pricing Tools
• Price Monitoring
• Develop and Report on Leading Indicators of
  Trends in Loss Experience
• Full Evaluation of Loss Experience

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Price Monitoring

• Different Approaches
• Rates
• Renewal to Expiring
• Comparisons to Benchmarks (Manual rates Mods)
• Account by Account and Sampling

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Price Monitoring

• Importance of Price Monitoring
• Leading Indicator
• Forecasting
• Development of Rate Indications
• External Reporting
• Reserving (Importance often missed and not used)

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Price Monitoring

• Price Monitoring Systems
• Rates
• Universal exposure base (e.g., PP Auto WC)
• Mix issues can distort
• Simple, if you have good exposure data
• TOP U/Ws will often have a good sense of the
  appropriate rate levels (e.g., Long Haul Trucks)
• Renewal to Expiring
• Used in much of the public reporting
• Good exposure information important
• Coverages/Limits/Attachment points

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Price Monitoring

• New Business Monitoring
• Typical New Business 15 to 20 of Total Premium
  (varies by Segment)
• Soft Market Indicator 25 or greater than
  historical levels
• Important to Monitor New Business Rate Levels to
  Renewals
• Soft Market -- New Business often with Price
  Levels 10 less than Renewals
• Good Pricing Benchmarks Critical to Monitor New
  Business

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Price Monitoring

• Comparison to Benchmarks
• Mods Related to Benchmarks
• Experience/Schedule/IRPM/(a) rating, etc.
• Good benchmarking practices
• Often Industry Loss Costs adjusted for an
  Insurers Expense Profit Loads
• Critical to Develop Benchmarks where None exist
• Set Goals for Front Line Pricers

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Leading Indicators of Trends in Loss Experience

• Claim Frequency Ratios (Reported Counts to
  exposures or to premiums at common rate level)
  at Appropriate Level of Detail
• Accident Quarter Reported Loss Ratios
• At quarterly evaluations
• Little known after 3 months for casualty lines 6
  month evaluations are often tell tale
  directionally
• Seasonality Issues
• Noise vs. Real Trends

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Leading Indicators of Trends in Loss Experience

• Historical Reported Loss Ratios on Business
  Renewed vs. Non-Renewed
• New Business Reported Loss Ratios vs. Renewal
  Reported Loss Ratios
• New Business/Total Business Mix

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Full Evaluation of Loss Experience

• Accident year/policy year profitability analysis,
  reserve reviews and rate indications
• To project current and prospective loss ratios we
  need a solid understanding of
• underwriting actions
• price changes
• non-price actions
• claims handling actions

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SUMMARY

• Price Monitoring Critical
• Good Exposures and Benchmarks Often Missing
• New Business
• Lead Experience Indicators
• Forecasting and Reserving Need to Reflect Price
  Monitoring
• Plans should be Dynamic and Reflect What is
  Happening

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• Tom Duffy, FCAS, CPCU, ARM
• 55 W. Monroe, Chicago, Il.
• Tom.Duffy_at_milliman.com
• 312-499-5634