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Rate Monitoring
London CARe Seminar: Pricing and Issues in Today’s Market
September 15th
Paul Lucas
Agenda
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Why
How - examples
Issues
Suggestions
Why monitor rate movements
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Management Information
Investor communication
Regulatory requirement
Reserving analysis
Reinsurers want to know
Where are we in the cycle relative to in the
past – key for portfolio management
decisions / reserving
US GL Rates
GL Rating Index Council of Insurance Agents & Brokers
200
180
GL
160
140
GL adj for CPI
120
100
GL adj for 7%
trend
80
60
200901
200804
200803
200802
200801
200704
200703
200702
200701
200604
200603
200602
200601
200504
200503
200502
200501
200404
200403
200402
200401
200304
200303
200302
200301
200204
200203
200202
200201
200104
200103
200102
200101
200004
200003
200002
200001
199904
199903
Is the market going to respond?
How to monitor rate movements
• Compare what you’re charging this year to
last year, adjusting for any changes in
exposure & contract terms
• Compare adequacy of rates charged
against technical premium, year on year
• Metrics only meaningful when used
together
Worked Example
2007
92,000,000
3,000,000
2,000,000
1 at 75% & 5 free
2.50%
2008
120,000,000
3,000,000
2,000,000
1 at 100% & 5 free
2.20%
Basic RI Premium
2007
2,300,000
2008
2,640,000
2008 Primary Rate Change
Underlying Exposure Inflation
2007 Income adjusted to 2008
Exposure Change
2007 Premium Adjusted Exposure
-8%
3%
87,179,200
38%
3,165,893
Subject Income
Limit
Excess
Reinstatements
Rate
Reinstatement Adjustment
2007 Premium Adjusted T&C
Premium Comparison
Effective Rate Change
6.5%
2,973,324
2007
2,973,324
2008
2,640,000
-11%
Worked Example
2008 Basic Premium
2008 Loss Cost
2008 Loss / Limit
No Losses
0
1
2
3
4
5
2,640,000
1,700,000
57%
Loss Amount Probability
0
57%
3,000,000
32%
6,000,000
9%
9,000,000
2%
12,000,000
0%
15,000,000
0%
Basic Premium
Ultimate Premium
RI Value 07
0
636,638
0
0
0
0
2,640,000
3,276,638
% Change
RI Value 08 07 Terms 08 Terms
0
0%
0%
848,851
75%
100%
0
0%
0%
0
0%
0%
0
0%
0%
0
0%
0%
2,640,000
3,488,851
6.5%
Issues
• Quantifying the unquantifiable – expert
judgments
• Group wide consistency – clear guidelines
• Understanding – training & reviews
• New business & portfolio churn –
adequacy – why are we winning it
• Claims driven increases - adequacy
Issues
• Risk by risk or portfolio level – homogenous
risks vs big ticket
• Loss sensitive features – swing – worth the
detailed calculations?
• Underestimate absolute size of increases and
decreases – see graph – terms and
conditions?
• Lost business – affect on portfolio
performance
• Treatment of inflation – in or out?
Be wary with On level LR’s
Historic and selected ULRs
200%
Historic
ultimates
180%
160%
On-level
projection
140%
120%
100%
80%
60%
40%
20%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Understate magnitude of rate increases and decreases
– leads to on level soft market years looking worse
than on level hard market years – another force is at
play
Suggestions
• Consider alongside other metrics –
technical price, priced LR, line size profile
• Embed in business from top down
• Workshops with underwriters
• Audits and checks on numbers
• Reserving new years more than on
leveling prior years experience
• Benchmark to industry for sense checks