Managing Through the Underwriting Cycle Spring 2005 CAS Convention By Joseph Boor, FCAS, Owner-Actuarial Education Servi

1. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services •  Few Brief Notes Before Starting

2. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services •  Why am I Up Here?

3. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Disclaimer • I work for the Florida Office of Insurance Regulation. • I work in the Financial Oversight area, not Rate and Form review • I’m speaking as a private individual • Nothing I say should be interpreted as policy of the Florida Office of Insurance Regulation.

4. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • What I Will Cover 1.   Short Description of Cycle and It’s Phases a.    Including the role of actuaries 2.   Impact on Consumers/Risk Managers 3.   Impact on Insurance Business 4.   Economic Moats as a Defensive Measure 5. Viability of Companies with Strong Economic Moats

5. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Current Market Phase • Softening

6. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services

7. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services •  How the Cycle Works • Right now, are in a softening phase

8. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services •  What can be concluded about current phase? • Area where extremes occur • Effective decreases larger than price changes • Some lines may still be profitable • Not all lines are affected equally

9. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Per internal study 1995-2004 reserve adequacy at 12/31/04 • Most lines adequately reserved • Workers comp is major exception • 2004 Homeowners cat impact on reserves untestable.

10. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Conclusion: Market is softening, but can go much softer

11. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services •  To the Trough of the Soft Market

12. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • To the Trough of the Soft Market • a. Pricing will continue to decrease • b. If reserving stays adequate, operating losses on underwriting will be reported. • They will certainly occur. • c. If events follow prior patterns, reserving will not stay adequate • differences between cos. • actuaries role in extending the cycle

13. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • First, industry will only show profit = bond return if surplus was invested in bonds • Assumes break-even on underwriting • Likely true profitability is negative • Eventually, market segments will report underwriting losses

14. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • End of the Soft Market Eventually, some companies will go under and some companies will abandon losing ventures. For undetermined reasons, these tend to all occur at about the same time Revision in underwriter budgets/available premium ratio.

15. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services The Hard Market • Develops quickly • underwriters suddenly have more pricing power.

16. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services The Hard Market – Secondary Phase • Surplus squeezed by rising rates • Profits underreported at some cos. • Another role of the actuary • Some risks are completely ‘orphaned’

17. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services End of the Hard Market • Textbook economic response to greater profitability occurs • Relatively slow developing of soft market

18. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Consumer/Risk Manager View: • ‘Why do you (insurance industry) make my life/job unduly difficult?’

19. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Risk Manager View: • Can exploit cycle by ‘buying low and selling high’

20. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Impact on ‘Business’ Part of Insurance Business • Strong management and superior execution, etc. may not deliver profits.

21. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Impact on ‘Business’ Part of Insurance Business • Incredible pressure to manage reserves in ‘average performer’ as well as ‘lackluster’ companies

22. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Impact on ‘Business’ Part of Insurance Business • Weakened results culture • Note the long-term slide of what were once industry leaders

23. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Strategies for Dealing with the Cycle • Expand in hard markets and contract in soft markets • Constant Market Share

24. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Economic Moats As a Defensive Measure in Soft Markets

25. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services • Economic Moats As a Defensive Measure in Soft Markets • Definition of Economic Moat – Some aspect of the company’s operations or product that partially or totally insulates the company from competition and is hard for competitors to replicate.

26. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services   Sample Aspects of Economic Moats 1.   Service 2.   Risk Selection 3.   Coverages Offered 4. Loss Control

27. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services   Niche Approach to Economic Moats 1.   Service Tailored to Niche 2.   Understanding Loss Cost Drivers

28. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services   Unlike Other Industries, a Moat Does Not Guarantee Profits Example from Personal Experience

29. Managing Through the Underwriting CycleSpring 2005 CAS ConventionBy Joseph Boor, FCAS, Owner-Actuarial Education Services Summary