CAS Ratemaking Seminar March 9-10, 2000 San Diego, CA

1. CAS Ratemaking Seminar March 9-10, 2000 San Diego, CA FIN-31: International Rate-making Applications of DFA “Presenting DFA Results to the CEO” John Birkenhead FIA MAAA ASA Practice Head, P&C Consulting, Mercer London

2. Highlights • Quick Recap on DFA • How to effectively present DFA to the CEO • ------ or------

3. Highlights • So you’ve done your DFA model • You now have to present it to the CEO • What can go wrong?

4. Recap on DFA • DFA - The concept : • - analysing the financial condition of an insurance enterprise • DFA - The process : • - testing scenarios and assessing the effect on the surplus • DFA - The benefits : • - better control of the company’s risk profile and surplus

5. Recap on DFA • DFA - Possible results : • - Inappropriate : • pricing • growth/business plans • reserving/timing of surplus release • re-insurance • investments

6. The CEO • These are all key fundamental issues • But why might the CEO not be interested…? • Or, put another way… • ...why might the CEO not be interested in what an actuary has to say…?

7. The CEO • The CEO probably : • is not an actuary • sees actuaries as “back-office” number-crunchers • is often being presented with requests for : • more capital • more staff etc. etc. • So what can you do, as an actuary, to influence the CEO?

8. The CEO’s Agenda • The CEO’s Agenda - “The 7 P’s”

9. The CEO’s Agenda • The CEO’s Agenda - “The 7 P’s” • Profitability

10. The CEO’s Agenda • The CEO’s Agenda - “The 7 P’s” • Profitability…maximised by the right combination of : • Products (Design, Distribution)

11. The CEO’s Agenda • The CEO’s Agenda - “The 7 P’s” • Profitability…maximised by the right combination of : • Products (Design, Distribution) • People (Markets, Customers)

12. The CEO’s Agenda • The CEO’s Agenda - “The 7 P’s” • Profitability…maximised by the right combination of : • Products (Design, Distribution) • People (Markets, Customers) • Prices (Rates)

13. The CEO’s Agenda • The CEO’s Agenda - “The 7 P’s” • Profitability…maximised by the right combination of : • Products (Design, Distribution) • People (Markets, Customers) • Prices (Rates) • People (Internal Staff)

14. The CEO’s Agenda • The CEO’s Agenda - “The 7 P’s” • Profitability…maximised by the right combination of : • Products (Design, Distribution) • People (Markets, Customers) • Prices (Rates) • People (Internal Staff) • Processes (Underwriting, Reserving)

15. The CEO’s Agenda • The CEO’s Agenda - “The 7 P’s” • Profitability…maximised by the right combination of : • Products (Design, Distribution) • People (Markets, Customers) • Prices (Rates) • People (Internal Staff) • Processes (Underwriting, Reserving) • Platforms (Technology)

16. The CEO’s Agenda • Profitability • what, where and how? • - what are the ‘profits’ e.g. reserve releases, expense margins, etc. • - where will the profits be in future economic scenarios e.g. DFA models • - how can the profits be maximised e.g. costs of changes vs benefits

17. The CEO’s Agenda • Products (Design, Distribution) • harmonisation of product design to distribution strategy • - challenge whether the distribution channel is profitable • - what are your competitors doing (internet, supermarkets etc.?) • - dare to be different ? (e.g. new UK product design) • monitor competitors’ product design • - are their product designs (not their rates) more attractive?

18. The CEO’s Agenda • People (Markets, Customers) • challenge “status quo” in current market • - don’t always follow the herd/try a ‘niche’ market • learn from other countries’ experience • - socio-economic data, retention methods (e.g. new UK product)

19. The CEO’s Agenda • Prices (Rates) • be pragmatic - there is always uncertainty over data, assumptions etc.. • consider macro (“CEO”) as well as micro level issues • (e.g. what are your competitors doing/what will their reaction be?) • ‘consistency’ with reserves - explicit link to financial statements • use simple, transparent rating structure - easy to manage and communicate..??

20. The CEO’s Agenda • People (Internal Staff) • recognise the CEO’s agenda (not just yours) : • - understand and communicate the wider business and strategic implications • recognise that the CEO may not be an actuary : • - deliver well-reasoned ideas, not mathematical formulae • recognise inter-disciplinary working : • - non-actuaries (e.g. underwriters, accountants) are essential to deliver well- reasoned business propositions from DFA models

21. The CEO’s Agenda • Processes (I) - Rate-making is not just about prices • monitor the whole process chain, not just the financials : • - be in control of : • - underwriting referrals, acceptance ratios…etc. • - claims handling (speeding up, backlogs, over-prudence) • - be able to monitor efficiency improvements (Activity Based Costing - ABC) • - banish departmental “turf wars” - share best practice (e.g. reserving and rating, underwriting and claims handling)

22. The CEO’s Agenda • Processes (II) - Having a clear vision • Have a clear vision of : • - ideal future state vs. “quick wins” • - resources needed vs. time to benefit • Example : You ask your CEO to implement DFA models

23. The CEO’s Agenda • Processes (II) - Implementing a DFA model • Model #1 : “Ideal future state” : • Complex, thorough model • Many scenarios modelled • All assumptions tested • For all lines of business • - Resources : 100 man-days + ??? • - Time to benefit : 3 months + ???

24. The CEO’s Agenda • Processes (II) - Implementing a DFA model • Model #2 : “Quick win” : • Simple model (to illustrate the principles) • A few simple scenarios tested • Lots of explicit (but reasonable) assumptions • For one line of business only • - Resources : 10 man-days + ? • - Time to benefit : 1 month + ?

25. The CEO’s Agenda • Processes (II) - Implementing a DFA model • Model #1 vs. Model #2 • “Ideal future state” vs “Quick win” • 100 man-days vs 10 man-days • 3 months to benefit vs 1 month to benefit • “Your agenda” vs “The CEO’s agenda” • Which of these models is the CEO more likely to approve?

26. The CEO’s Agenda • Platforms (Technology - software and hardware) • software : consistency of data • - consistent data is important e.g. different data definitions!!! • hardware : system upgrades/changes • - emphasise that legacy data is important!! • communication to the CEO : estimate the real $ cost of poor data • e.g. “my DFA model includes a data deficiency/contingency/prudence reserve of $xyz million due to sparse data”

27. The CEO’s Agenda • Recap on CEO issues - “The 7 P’s” • Profitability…maximised by the right combination of : • Products (Design, Distribution) • People (Markets, Customers) • Prices (Rates) • People (Internal Staff) • Processes (Underwriting, Reserving) • Platforms (Technology)

28. How rate-making P&C actuaries can influence CEOs • Make sure that you communicate clearly : • -the source and sustainability of profits • - the business process risks e.g. poor data quality • ... and the $ cost on reserves/rates • - any implicit assumptions - they can’t be monitored/controlled easily • - any inefficient processes - wasting time, effort and money • - wider business issues (e.g. what the competition is doing/may do in response)

29. How ratemaking P&C actuaries can influence CEOs • But most of all : • Consider what the CEO needs to hear (“The 7 P’s”) • Be pragmatic and commercially focussed • - there is ALWAYS uncertainty in rates/reserves • - there is never (usually) one correct answer

30. How ratemaking P&C actuaries can influence CEOs • And finally : • Be clear on “ideals” vs. “Quick Wins” (“Your agenda” vs. “The CEO’s Agenda”) • - the CEO is more likely to want quick benefits, rather than resource-intensive long-term projects

31. The benefits • The Benefits of Influencing the CEO • Enhances the standing of actuaries in your company • Enables your company to thrive and not just survive • Enables our profession to thrive and not just survive

32. CAS Ratemaking Seminar March 9-10, 2000, San Diego, CA FIN-31: International Rate-making Applications of DFA “Presenting DFA Results to the CEO” John Birkenhead FIA MAAA ASA Practice Head, P&C Consulting, Mercer London Disclaimer : “The views in this paper are my own, and not necessarily shared by the co-sponsors of the program, nor my past or current clients nor my past or current employers.”