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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 November 3, 2005 1998 1999 2000 2001 2002 2003 03 November 2005 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 November 3, 2005 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 November 3, 2005 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 November 3, 2005 03 November 2005 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, November 3, 2005 03 November 2005 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