2. Price Monitoring A Practical Example Primary Company Perspective Larry Schober Pricing Actuary

3. Price Monitoring A Practical Example The views expressed are those of the speaker. They are not necessarily the views of the CAS, AEGIS, …

4. Price Monitoring A Practical Example Price Monitoring: General approach Benefits – what’s in it for me Hurdles Observations on Property Shortfalls / Pitfalls

5. Price Monitoring A Practical Example Failure to Price Monitor "Far greater than hurricanes, earthquakes, asbestos and pollution, the failure to price monitor on a visible and consistent basis through the 90's was the source of the Property and Casualty Insurance Industry's greatest catastrophe...“ David Cash CAGNY 2003

6. Price Monitoring A Practical Example AEGIS – Associated Electric and Gas Insurance Services, Ltd. –Utility Industry (electric & gas) mutual insurer. –Variety of commercial casualty lines and property to monitor. Variety of coverages to monitor. –High excess, with varying retentions and limits to keep track of.

7. Price Monitoring A Practical Example Definition: Measure changes in rate levels achieved from one period to the next. –More than just premium changes. Example: change exposures by half, premium is halved, but pricing is unchanged. –Term is fraction of a year, pricing should be unchanged.

8. Price Monitoring General Approach Price Monitoring: General approach Benefits – what’s in it for me Hurdles Observations on Property Shortfalls / Pitfalls

9. Price Monitoring General Approach – Beginning Rigorous Monitoring Where to start price monitoring? –We began well over a decade ago. Begin at the beginning – started with largest. –Start simply, but start rigorous monitoring. –e.g. began with domestic; expanded to foreign. Expand as coding improves, or business expands.

10. Price Monitoring General Approach – Beginning Rigorous Monitoring Opportunity to be involved at the outset: –New rating plans or class systems. –Policy form, endorsements and exclusions. Opens the door to more than just making rates, premium levels and walking away. –For the primary co., collateral contributions are a big follow-on effect of price monitoring. Ways to Price Monitor?

11. Price Monitoring General Approach – Ways to Price Monitor Aggregate Data – portfolio. Price change on renewal –Match renewals w/like terms. Price change on renewal, and restate for exposure change. All renewal policies –Some adj. for limit and SIR. All policies – new, renewal –Re-rate individual policies. Increasing detail, complexity and accuracy. a.High retention ratio / homogeneous book b.Insureds in flux: consolidation deregulation competition c.Changing exposures, limits, retentions d.New business e.Existing database All policies – new, renewal –Re-rate individual policies. Doing the detailed work anyway… Price Monitor a step in ratemaking and reserving. The "easy" price monitors were additional work.

12. Price Monitoring General Approach – Index Calculation Re-rating sets a standard, or benchmark, for comparing what was collected (actual prem.). Re-rating standardizes changes in: –Exposure– Retention– Exclusions –Limit– Term– Inflation The index (ratio of actual to benchmark) marks the performance of collected premium to a consistent standard across all policies.

13. Price Monitoring General Approach – Index Calculation Taking ratios of indexes measures the change, from period to period, due to rates, merit rating factors and market forces. Index Calculation:

14. Price Monitoring General Approach – Presentation of Results How the index changes from period to period (taking ratios of indexes) measures rate change achieved AFTER changes in limit, retention, exposure, … –while controlling for shifts in SIR, limit... In the benchmark, the impact of changing limit or SIR is quantified from a severity fit. –Refitting = monitoring underlying shifts. Index can be converted to an adequacy point…

15. Price Monitoring General Approach – Presentation of Results Start with index that yielded an adequate premium level (taken from latest rate review). –Latest index value from most recent rate review, adjusted for any indicated (def. / red.). Convert index to adequacy point: index of 0.75 yielded adequacy in the latest rate review; –Index of.80 >.75, so adequacy point is > 1.0 –an index reading of 0.80 is an adequacy point of 1.07 (1.07 =.80 /.75)

16. Price Monitoring General Approach – Presentation of Results Volatile monthly points “smoothed” Actual Premium: bars on the bottom

17. Price Monitoring General Approach – Presentation of Results Displays two key concepts 1. Changes in pricing (height of jump) 2. Adequacy of premium dollar (relative to 1.0) Visual display of changing adequacy AND pricing. Directly relates pricing changes to changing rate adequacy. –Improves dialog with underwriting

18. Price Monitoring General Approach – Presentation of Results Since data is by contract, it contains all new, renewal and lost business. By contract (policy), so you can monitor new, separate from renewal and lost. –Test pricing assumptions. What about new business?

19. Price Monitoring General Approach – Presentation of Results New business has a lower (or higher) adequacy point. Now what? –Check for new Underwriting Guidelines. –Position in the underwriting cycle plays a role. Hard market – new is likely stronger Soft market – new is likely weaker Successfully skimming the cream, or buying new business? What contribution can we make?

20. Price Monitoring Benefits of Monitoring Price Monitoring: General approach Benefits – what’s in it for me Hurdles Observations on Property Shortfalls / Pitfalls

21. Price Monitoring Benefits of Monitoring 1.Decision making. –Setting targets: Trend & pricing changes – U/W on a treadmill. Target pricing by account (with exper. rating). Make the monitor a part of pricing “culture”. –Industry comparisons –Test indicated rate change vs. achieved change –Stratification (large vs. small pricing; high attachment vs. low attachment pricing).

22. Price Monitoring Benefits of Monitoring 2.Collateral contributions are a big follow-on benefit of price monitoring. –Simple act of monitoring leads to u/w changes. 3.Underwriters share ownership of report. –More frequent contacts with underwriting –They ask for more information. 4.On-level factors for ratemaking. –Natural by-product of monitoring

23. Price Monitoring Benefits of Monitoring 5.Helps in reserving – exposure to loss and layering of exposure to loss. –Ceded XOL contracts and IBNR by layer. 6.Monitor pricing by underwriter… –Possibly a source of contention.

24. Price Monitoring Benefits of Monitoring 7.Useful back-test of trend using monitor: –are on-level loss ratios “flat” …

25. Price Monitoring Benefits of Monitoring 7.Useful back-test of trend using monitor: –are on-level loss ratios “flat” … Not enough trend

26. Price Monitoring Benefits of Monitoring 7.Useful back-test of trend using monitor: –are on-level loss ratios “flat” … Too much trend

27. Price Monitoring Hurdles Price Monitoring: General approach Benefits – what’s in it for me Hurdles Observations on Property Shortfalls / Pitfalls

28. Price Monitoring Hurdles 1.Need to be involved on a policy-level basis. –Big challenge, but big follow-on rewards. 2.Footing to the financials. –Increases credibility & reliability of monitor… –but complicates it as well: Data reconciled to Accounting data, but at the detailed coverage level suitable for re-rating.

29. Price Monitoring Hurdles 3.Takes Time: initially, 2+ years for comparison. –Data Quality –New Business (earlier) New business in existing line – comparable New business in new line – hard to compare. 4.Programming – not for the faint of heart. –Contracts are customized – exceptions.

30. Price Monitoring Hurdles 5.Detail of data capture down to the level at which underwriters rate – coverage level. –Primary closer to data than reinsurer. 6.Changing systems. –New rating plans. –New underwriting systems. –Not “once and done”…

31. Price Monitoring Property Price Monitoring: General approach Benefits – what’s in it for me Hurdles Observations on Property Shortfalls / Pitfalls

32. Price Monitoring Property Personal Lines : lots of similar policies, little judgment. Commercial Casualty : fewer policies, more judgment. Commercial Property : even fewer policies (more layers), but the most judgment. –Judgment makes property programming difficult.

33. Price Monitoring Property Property - more complicated (less standardized) line than casualty. –Approach for property: simpler than casualty. Pricing on renewal, re-rate to expiring, adjusting for changes in exposure and layer. Do you pare back renewal coverages, or build up expiring to compare renewals? –Benchmark rating - which benchmark? –What scale are they using - real differences?

34. Price Monitoring Property – Changes by Band

35. Price Monitoring Property – Average

36. Price Monitoring Property – Average with Maximum and Minimum

37. Price Monitoring Shortfalls / Pitfalls Price Monitoring: General approach Benefits – what’s in it for me Hurdles Observations on Property Shortfalls / Pitfalls

38. Price Monitoring Shortfalls / Pitfalls 1.Exposures: underwriters think actual, the monitor only sees our “proxy” exposure: –May legitimately be pricing for exposure changes we fail to see. –Inflation sensitive exposures need adjustment. 2.It takes a computer to really mess things up: –Drive to automate, but changing endorsements, forms, coverages were speed bumps.

39. Price Monitoring Shortfalls / Pitfalls 3.Continuing to monitor during a soft market. –Need commitment by Senior Management. –Everyone loves to hear about pricing when prices are going up. –“Good” news when monitoring during the hard market builds “street cred” with underwriters. 4.Finally, price monitoring quantifies - that’s our strength as actuaries - –but it’s still a model.

40. Price Monitoring Shortfalls / Pitfalls Correcting the shortfalls (avoiding the pitfalls) - feedback loop with positive results: –Frequent review forces us to (re)-examine : Trend Severity Coverage changes –Reinforces underwriter contact.

41. Price Monitoring A Practical Example – Conclusion Price monitoring helps us speak rationally to: –Management –Colleagues in Underwriting –Reinsurance partners Let’s see how …