Price Monitoring: A Governance Issue Isaac Mashitz - Swiss Re

1. Price Monitoring: A Governance IssueIsaac Mashitz - Swiss Re CAS Seminar on Ratemaking March 8, 2007 Price Monitoring A Governance Issue CAS Ratemaking Seminar 3/8/200

2. Governance Aggregate Accumulations Policy Wordings Underwriting Operations Outward cessions Price Adequacy etc. Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

3. Price Adequacy Understand and measure past and current profitability Understand and measure changing exposure environment Identify or create usable benchmark Monitor each pricing judgement Monitor External Rates/Prices Monitor Internal Rates/Prices Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

4. Why is Price Monitoring So Important?? Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

5. US P&C Primary IndustryGeneral Liability Occurrence Loss Ratios Note GL includes Products Liability. Losses grew at about 5% per year since 1987 and 7% per year since 1996. Smoothing the premium virtually eliminates the cycle with only a small residual cyclical effect. Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

6. US P&C Primary IndustryGeneral Liability Occurrence Loss Ratios Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

7. US P&C Primary Industry Commercial Casualty Losses* vs US Gross Domestic Product Over the long term, losses and GDP have grown at approximately the same rate. Losses as a % of GDP grew in the soft market and declined since 2002. Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

8. Umbrella:Average Prices Per Million Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07 Source: Marsh

9. Three Generic Primary Rate Monitors Individual Policy Comparisons at Renewal Need to adjust for (lim, att pt, exposure) Unable to adjust for mix of business New vs Renewal Rate per Exposure Metric for Homogeneous Segments Homogeneous segments rare for Commercial Lines Comparisons to Benchmark Need detailed benchmark Questionable accuracy by mix Consistency over time Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

10. Renewal Business Bias Assumptions Renewal Price Change -5% New Business Price Change -25% Renewal Retention 65% Results Calculated Actual Annual price deterioration -5% -12% Three Year Compound effect -14% -32% Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

11. Renewal Business Bias Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

12. Technical Issues Minimum Premiums Limits/Attachment Points What about capital charge differences Exposure Units: Auto vs GL Primary Premium Primary Expected Loss D&O Market Value or Sales vs Market volatility Schedule credits and debits Experience mod/PH DIV/Retrospective rated Rate increase vs “real achieved” Risk Classification/Tier Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

13. Systemic Issues Objectivity vs Subjectivity New Business & Lost Business Terms and Conditions Underwriting risk selection and guidelines Movement in a soft market from E&S to Standard market Generally these items leverage and exaggerate calculated price movements Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

14. Terms and Conditions Correlates and leverages price declines in soft market D&O – Entity Coverage Umbrella – Aggregate Drop Downs EPLI on GL/Umbrella policies for free Extended reporting periods on prior acts for free Multi year policies with cancellation option for free Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

15. Reinsurer Issues Reinsurer needs to understand thoroughly primary rate monitor Commission changes vs Premium changes – Reinsurer and Primary have different objectives Measure against internal planning objective – alternate purpose Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

16. Premium at Present Rates Approach Works well for: Personal Lines Standard and Small/Medium Commercial Lines Rates current in force book at last year’s and this year’s rate levels Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

17. Sophisticated Benchmark Used for: Reinsurance treaties Large commercial Accounts Individually analyzed and priced deals Consistently parameterized individual account pricing model Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

18. Sophisticated Benchmark Need to measure actual parameters vs default parameters Need to measure use of credibility against a standard Experience vs Exposure rating Experience years Etc. Interest Rate Movement Subjective Issues Underwriting/Risk selection improvement/deterioration Terms and Conditions Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

19. Reasons for having strong price monitoring Input into reserving process Input into corporate and strategic planning Creates transparency on the pricing decisions and drives appropriate discipline Price monitoring is important to reinsurers in the pricing process Poor metrics will often be thrown out or tempered and replaced with more punitive defaults. Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07

20. GovernanceThe Age of Information On an individual account basis: Record each pricing action/judgement actual vs default parameters credibility usage Measure actual loss emergence vs expected Measure actual loss payout vs expected Measure actual premium pay-in vs expected Measure actual profitability against expected etc. Price Monitoring: A Governance Issue CAS Ratemaking Seminar 3/8/07