Target Markets 2004 Summit

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(No Transcript)
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Target Markets 2004 Summit

• Anatomy of Failed Programs
• David A. Jordan
• Senior Vice President
• Lexington Insurance Company

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Objectives

• Why are we qualified to talk about failed
  programs?
• What does the data show?
• What are the root causes?
• What can program administrators and program
  underwriters do to prevent failures?

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Our Qualifications

• The AIG Companies underwrote their first
  commercial property-casualty program in 1964 40
  years of hard-earned lessons.
• Todays success comes from surviving the failures
  of the past, learning from them, and applying the
  lessons learned to current business.
• Best Practices strategy dictates continually
  testing assumptions, controls and practices.

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What does the data show?

• Terminated Programs, CYs 1993-2004 (valued as of
  9/30/04)
• GWP 1,063,973,605
• Incurred Loss/Expense 1,982,582
• L/LAE Ratio 186.3
• Source AIG iOPAL System, all inactive DSPs

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Recent Experience

• CYs 1999-2003
• 139 DSPs
• GWP 208,648,464
• Lines of Business
• Primary/Excess Casualty
• Commercial Auto (incl. Garage)
• Professional Liability
• Commercial Property/Inland Marine

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Earnings Drag

• Failed Programs from 1993-2001 added 134.9M of
  Loss and Expense to CYs 2002-2004
• CY 2004 impact is 2.9 combined ratio points

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Common Denominators

• Profitability / Rates / Actuarial Analysis
• Claims Handling
• Underwriting
• Segregation of Duties
• Financial
• Risk Management
• Technology
• Interests of Parties Not Aligned

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Profitability

• Failure to understand profitability issues (loss
  development, trend, impact of ILFs)
• Failure to subject portfolio to actuarial
  analysis
• Failure to act on actuarial findings
• Failure to monitor rate/exposure changes
• Failure to spot the too little, too late
  syndrome

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Claims Handling

• Conflicts of interest (MGA/TPA common ownership)
• Failure to spot claims trends
• Failure to derive book-of-business findings from
  claim analysis
• Failure to understand impact of large losses and
  LAE
• Failure to manage litigation

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Underwriting

• Failure to develop and adhere to risk selection
  and pricing criteria
• Failure to understand underwriting performance of
  book
• Failure to audit the book and act on audit
  findings
• Failure to keep up with external environment
  affecting the portfolio

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Segregation of Duties

• Failure to segregate Management from All Other
• Failure to segregate Sales/Marketing from
  Underwriting
• Failure to segregate Underwriting from Claims
• Failure to segregate Finance from All Other

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Financial

• Failure to operate in a fiduciary capacity
• Failure to understand and address credit risk
• Failure to reconcile premiums v. cash
• Failure to have financial management controls and
  test them

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Risk Management

• Failure to understand the business being written
• Failure to identify and proactively address risk
  exposures
• Failure to apply broad knowledge gained from
  portfolio to improve individual risks
• Failure to continually upgrade portfolio

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Technology

• Failure to automate processes (rating/quoting/issu
  ance/billing/booking)
• Failure to test for data anomalies
• Failure to upgrade technology
• Failure to adopt disaster planning and disaster
  recovery plans
• P.S. Who owns the code and the data?

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Interests of Parties Not Aligned

• Failure to communicate
• Failure to articulate overall strategy v.
  operational tactics
• Failure to identify and address deficiencies
• Failure of management to be involved
• Failure to identify changing landscape
• The too big to fail strategy

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All Is Not Lost

• Clear Strategic Vision
• Definitive Operational Tactics
• People and Infrastructure
• Partnerships
• Communication
• Audit, Audit, Audit
• Know When to Walk Away

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Thank You!Questions Discussion?