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Tom Duffy
Midwest Actuarial Forum
September 23, 2004
Tools for the Soft Market
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
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Universal exposure base (e.g., PP Auto & WC)
Mix issues can distort
Simple, if you have good exposure data
TOP U/W’s will often have a good sense of the
appropriate rate levels (e.g., Long Haul Trucks)
– Renewal to Expiring

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Used in much of the public reporting
Good exposure information important
Coverages/Limits/Attachment points
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Price Monitoring
– New Business Monitoring
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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

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Mods – Related to Benchmarks
– Experience/Schedule/IRPM/(a)
rating, etc.
Good benchmarking practices
– Often Industry Loss Costs adjusted
for an Insurer’s 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. NonRenewed
 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.
 [email protected]
 312-499-5634

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