Download The Actuary and Street Pricing General Insurance Actuaries

03 November 2005
The Actuary and Street Pricing
A dialogue
to help you generate ideas
to share views
to list things that might affect our profession
November 3, 2005
General Insurance Actuaries
In the mid 70s some 30 actuaries, of
which 5 or 6 did quite a bit on pricing
Now over 1000, of which maybe 150+
focus on pricing
What have we achieved?
November 3, 2005
Company & Syndicate Loss Ratios
160%
140%
La
120%
Lb
Lc
100%
Ld
Lf
80%
A
B
C
60%
D
E
40%
F
20%
0%
1996
1997
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1998
1999
2000
2001
2002
2003
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Company Underwriting Value Creation 1996-2003
300%
D
200%
E
G r o w th in G W P
C
100%
Industry
A
F
B
0%
-2000
-1000
0
1000
2000
-100%
Value Cre ation/Destruction (£m)
November 3, 2005
Syndicate Underwriting Value Creation 1996-2001
500%
Ld
400%
G r o w th in N W P
Lf
300%
200%
La
Industry
Lb
100%Lc
Le
0%
-200
-100
0
100
200
Value Cre ation/Destruction (£m)
November 3, 2005
Company Combined Operating Ratios
140%
130%
120%
A
B
110%
C
D
100%
E
F
90%
80%
70%
1996
1997
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1998
1999
2000
2001
2002
2003
03 November 2005
How pleased should we be????
November 3, 2005
High level framework
Investment
allowance
Time in force
Claims
Overall pricing level
Product, customer or
market based pricing ?
Expenses
Champion/challenger
What optimise?
Capital/ROC goals
Technical price
Optimisation, market and
business criteria
Dynamic pricing
Granularity and factors
Market and selection
New/renewal, channel and
marketing alignment
Relative pricing level
Reinsurance
Competitor and market
intelligence
Underwriting, T & C,
product, marketing and
cycle
Customer management and
non-pricing actions
Channel, systems and
people (constraints?)
Technical insurance
price
Street price
November 3, 2005
What do we mean by terms?
Technical price
Claims cost model
Risk premium
Best estimate of real costs from underwriting a policy
Best estimate of premium to achieve target ROC
Street price
Price actually charged to the customer
Price before broker adjustments
Price as used by underwriter
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03 November 2005
So what are the weaknesses?
Results of Brainstorm at GIRO
Is the actuary to blame
Other pressures
CEO goals
Finite business (zero sum game)
Risk and less than ideal margins
Volatility
Goal satisfying
Not using complex customer buying power information
Upper echelons don t understand?
Complexity?
Relative rather than overall pricing
been our focus
Capital costs
Push for more influential roles
Should we be underwriters
Human nature that people want to
ignore the truth?
Too many oars
Only just starting to get involved in
the demand side
Trade-off goals : maximise profit,
with business constraints?
Inadequate impact analyses
Systems constraints
Time constrained
Not understanding the modelling
assumptions/method constraints
November 3, 2005
Weaknesses
pre-GIRO thoughts
Expense allocation
Combining U/W and pricing
Marketing and selling
Focus on claims cost analysis
Inward looking?
Tendency to GLMs alone
Not market focused games theory, optimisation
Overall lack of alignment
Overly mathematical
Not forward looking enough; heterogeneity
Too product driven
Predictive factors still only proxies
Too inward looking (by industry and geography)
Seen as technical, overly mathematical and not streetwise
November 3, 2005
Market intelligence systems
Don t mean what-if !
List all possible sources of relevant information
Seek intelligence
Conversations
Surveillance
Bugging
Web-sites
Press and media
Campaigns (ATL/BTL)
November 3, 2005
03 November 2005
Underwriting
How does capital allocation affect overall and individual
risk pricing?
What is an optimal portfolio mix?
How do we respond to current market pricing conditions?
What do we do, now our plan assumptions are invalidated?
How do we allocate expense, and what approach do we
take to lifetime value thinking?
What risk do we retain/lay-off?
How controlled should we be with our front-line
underwriting?
The move to allocating diversified capital will change business unit and
individual performance measures. The MIS and risk/investment thinking will
affect the market
November 3, 2005
Claims
How do we judge the trade-off between cost performance and
productivity?
As we change our organisation what will loss of expertise do to our
ICA?
How are we dealing with fraud and large claims settlement risks?
Do we need to add new KPIs to our tracking?
What does the feedback loop to underwriting mean?
How does change in claims practice affect reserving, and when does it
feed into the P & L account?
Does the new system deliver what we want at terms that make sense to
our ICA?
How do we make the required new performance system relevant to
front line claims people?
A proper risk/control framework can improve value, reduce unexpected loss
and help all departments ensure their work is aligned to group objectives
November 3, 2005
Behavioural pricing
Inertia pricing?
People respond in different ways
A phone call
An e-mail
At the moment of claim
On going dialogue, eg mid-term (how
expensive??)
Recognise individual s propensity to claim
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Optimisation
Of what
Marginal contribution
Life time value
Risk adjusted lifetime value
Focus of effort
Parameter/model/risk uncertainty
November 3, 2005
Organisations!
Where does the leadership come from
How clear and consistent are the objectives
How are roles and responsibilities allocated
What sort of behaviours work
How are decisions taken
What degree of risk is acceptable (action vs governance)
What is the culture
What is the degree of change and appetite going forward
How is conflict dealt with
Where does the power lie and how does it view actuaries
What do people say about you
November 3, 2005
Systems
Speed of change
Degree of flexibility
Channel variations
Data reliability, access, timeliness,
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Processes
How clearly mapped is the street pricing and
underwriting process
Links and controls
How are judgements made
What is the governance
Where are the delays built into the system
What degree of tailoring
Who has business responsibility
November 3, 2005
Communication
What
How
Whom (to and from)
When
Purpose (shared/conflict/one or n-way)
Frequency
Style
November 3, 2005
The Mckinsey way?
Buying McKinsey won t get you sacked
But will it make you a true winner
November 3, 2005
..
03 November 2005
Input from all areas throughout
organisation required
DISTRIBUTION
Business mix by
panel member
Profits by panel
member
Type of distribution
Strategic re-broking
COMPETITORS
What-if analysis
Gross versus Net of
commission
MARKETING
STRATEGY
Pricing
Retention actions
Marketing actions
Market share
Growth target
Profit target
ROC target
Retention
November 3, 2005
Conclusions
Your own actions
For the profession
For GIRO
November 3, 2005
CUSTOMER
Book of business
with company
Prior experience
with company