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Tools for the Soft Market: Prepare Now for Market Changes

Discover why companies should prepare for market changes in the soft market. This article discusses the benefits of pricing, the importance of price monitoring, and the use of leading indicators for forecasting and reserving. Actuaries can make a difference in areas such as strategic planning, pricing targets, and developing rate indications.

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Tools for the Soft Market: Prepare Now for Market Changes

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  1. Tom Duffy Midwest Actuarial Forum September 23, 2004 Tools for the Soft Market

  2. 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

  3. Where Can Actuaries Make A Difference? • 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

  4. Price Monitoring • Different Approaches • Rates • Renewal to Expiring • Comparisons to Benchmarks (Manual rates & Mods) • Account by Account and Sampling

  5. Price Monitoring • Importance of Price Monitoring • Leading Indicator • Forecasting • Development of Rate Indications • External Reporting • Reserving (Importance often missed and not used)

  6. 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

  7. 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 Renewals • Good Pricing Benchmarks Critical to Monitor New Business

  8. 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 Loads • Critical to Develop Benchmarks where None exist • Set Goals for Front Line Pricers

  9. Leading Indicators of Trends in Loss Experience • 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 directionally • Seasonality Issues • Noise vs. Real Trends

  10. Leading Indicators of Trends in Loss Experience • Historical Reported Loss Ratios on Business Renewed vs. Non-Renewed • New Business Reported Loss Ratios vs. Renewal Reported Loss Ratios • New Business/Total Business Mix

  11. Full Evaluation of Loss Experience • Accident year/policy year profitability analysis, reserve reviews and rate indications • To project current and prospective loss ratios we need a solid understanding of • underwriting actions • price changes • non-price actions • claims handling actions

  12. SUMMARY • 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

  13. Tom Duffy, FCAS, CPCU, ARM 55 W. Monroe, Chicago, Il. Tom.Duffy@milliman.com 312-499-5634

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