RCM – 4: From Enterprise Risk Management to Ratemaking How the Hartford’s Benchmark Methodology Approaches Risk, Price, Leverage and Return Across its Operations. Russ Bingham Vice President and Director of Corporate Research Hartford Financial Services Seminar on Ratemaking New Orleans, LA
RCM – 4: From Enterprise Risk Management to RatemakingHow the Hartford’s Benchmark Methodology Approaches Risk, Price, Leverage and Return Across its Operations
Vice President and Director of Corporate Research
Hartford Financial Services
Seminar on Ratemaking
New Orleans, LA
March 9-11, 2005
PRICE IS RISK-BASED
The price (premium) that reflects the volatility in each line of business and satisfies the risk criterion places the expected operating distribution on the risk / return line.
The price (premium) that satisfies the operating return risk criterion, by reflecting the volatility in each line of business, places the expected total return distribution on the total risk / return line. The operating return profile translates to total return.
The total return RCR risk metric is the same as the operating return RCR.
The risk / return line shown assumes a uniform leverage in all lines of business (typically corporate overall average).
All lines of business are restated to a uniform 15% return with uniform volatility via altered risk-adjusted leverage.
1. Thou shalt build only models that have an integrated set of balance sheet, income and cash flow statements
2. Thou shalt remain rooted in a policy period orientation and develop calendar period results from this base
3. Thou shalt reflect both conventional and economic accounting perspectives - guided by economics, constrained by conventions
4. Thou shalt recognize the separate contributions from each of underwriting, investment and finance activities
5. Thou shalt be guided by the risk / return relationship in all aspects
6. Thou shalt include all sources of company, policyholder and shareholder revenue and expense embodied in the insurance process
7. Thou shalt reflect all risk transfer activities
8. Thou shalt not separate risk from return
9. Thou shalt not omit any perspective or financial metric that adds understanding
10. Thou shalt allow differences in result only from clearly identified differences in assumption, and not from model omission