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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
Where Can Actuaries Make A
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
Price Monitoring
Different Approaches
– Rates
– Renewal to Expiring
– Comparisons to Benchmarks
(Manual rates & Mods)
– Account by Account and Sampling
Price Monitoring
Importance of Price Monitoring
– Leading Indicator
– Forecasting
– Development of Rate Indications
– External Reporting
– Reserving (Importance often
missed and not used)
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/W’s 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
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
Good Pricing Benchmarks Critical to
Monitor New Business
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 Insurer’s Expense & Profit
Critical to Develop Benchmarks where
None exist
Set Goals for Front Line Pricers
Leading Indicators of Trends in Loss
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
– Seasonality Issues
– Noise vs. Real Trends
Leading Indicators of Trends in Loss
Historical Reported Loss Ratios
on Business Renewed vs. NonRenewed
 New Business Reported Loss
Ratios vs. Renewal Reported
Loss Ratios
 New Business/Total Business Mix
Full Evaluation of Loss Experience
Accident year/policy year profitability
analysis, reserve reviews and rate
To project current and prospective loss
ratios we need a solid understanding of
– underwriting actions
– price changes
– non-price actions
– claims handling actions
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
Tom Duffy, FCAS, CPCU, ARM
 55 W. Monroe, Chicago, Il.
 [email protected]
 312-499-5634