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Managing a Company in a Soft
Market
March 13, 2006
Michael Fusco, FCAS, MAAA
Executive Vice President and Chief Actuary
CNA Insurance Companies
Managing a Company in a Soft
Market
The Role of the Actuary
Determine and maintain adequate rates and rating plans
Project appropriate reserves
Monitor and communicate how the business is performing
Make decisions based on analytics
Stochastic modeling (e.g. catastrophe management, confidence levels)
Provide consistent, objective indications
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Managing a Company in a Soft
Market
Illustrative Planning Assumptions
2005 GWP
Retention
Written Rate
Exposure Change
2006 Renewal GWP
2006 New Biz GWP
2006 GWP
4,000
75.0%
3.0%
2.0%
3,150
1,050 25.0%
4,200
GEP
L&ALAE
Expenses
U/W Profit
2006
4,100
2,540 62.0%
1,435 35.0%
125 97.0%
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Managing a Company in a Soft
Market
The Trade-off between Retention and Rate
100
12
95
10
90
8
85
6
80
4
75
2
70
Change in U/W Profit (millions)
Increase in GEP (millions)
Impact of a 5 Pt Increase in Retention vs. Various Reductions in Rate
0
0
-0.0025
-0.005
-0.0075
65
-0.01
-2
Reduction in Rate
Increase in GEP
Change in U/W Profit
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Managing a Company in a Soft
Market
Not All Lines of Business are Impacted Equally
Reduction in Rate which Negates a 5 Point Increase in Retention
67% LR
62% LR
57% LR
52% LR
0%
-1%
-2%
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Managing a Company in a Soft
Market
Deviation from Manual Rate
Manual Rate
 External source (e.g. ISO, NCCI)
 Internal source such as “actuarial indication” for loss-rated business (e.g. Large Accounts, Med Mal)
Deviations
 At the underwriter’s discretion (e.g. underwriting tier, schedule credits/debits, package mods)
 Excludes loss cost changes, experience mods
Metrics to Monitor
 Renewing vs. expiring deviations
 New business vs. renewal deviations
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Managing a Company in a Soft
Market
Examples of DFM Monitoring Tools
Spread in Deviation
0.2
0.1
0
-0.1
-0.2
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
Effective Quarter
Renewing vs. Expiring
Note: Data is for illustrative purposes only.
New vs. Renewal
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Managing a Company in a Soft
Market
Price-to-Exposure Analysis – Multivariate
 Increased computing power makes multivariate analysis more practical
 Personal Lines to Small Commercial Accounts to . . .
 Statistical testing of “Underwriting Lore”
 Avoid mistakes made in prior soft markets
 “Moneyball”
 Joint effort with Underwriting, Claims, and Risk Control
 Data quality and quantity relevant
 Need to capture deeper level detail accurately
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Managing a Company in a Soft
Market
Underwriting (Non-Rate) Effects
 Actuary has responsibility to quantify such and reflect appropriately in the loss ratio
 Examples of Non-Rate Effects
 Implementing predictive model based on multivariate analysis
 Shifts in portfolio mix (portfolio optimization)
 Exit portion of the book (e.g. state, industry group, class)
 Changes in Coverage (e.g. reduced limits, endorsements limiting coverage)
 Monitors must be put in place to verify such actions are occurring as predicted
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