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Price Monitoring: A Governance Issue Isaac Mashitz - Swiss Re. CAS Seminar on Ratemaking March 8, 2007. Price Monitoring A Governance Issue CAS Ratemaking Seminar 3/8/200. Governance. Aggregate Accumulations Policy Wordings Underwriting Operations Outward cessions Price Adequacy etc.

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Price monitoring a governance issue isaac mashitz swiss re

Price Monitoring: A Governance IssueIsaac Mashitz - Swiss Re

CAS Seminar on Ratemaking

March 8, 2007

Price Monitoring

A Governance Issue

CAS Ratemaking Seminar

3/8/200


Governance

Governance

Aggregate Accumulations

Policy Wordings

Underwriting

Operations

Outward cessions

Price Adequacy

etc.

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Price adequacy

Price Adequacy

Understand and measure past and current profitability

Understand and measure changing exposure environment

Identify or create usable benchmark

Monitor each pricing judgement

Monitor External Rates/Prices

Monitor Internal Rates/Prices

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Why is price monitoring so important

Why is Price Monitoring So Important??

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Us p c primary industry general liability occurrence loss ratios

US P&C Primary IndustryGeneral Liability Occurrence Loss Ratios

Note

GL includes Products Liability.

Losses grew at about 5% per year since 1987 and 7% per year since 1996.

Smoothing the premium virtually eliminates the cycle with only a small residual cyclical effect.

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Us p c primary industry general liability occurrence loss ratios1

US P&C Primary IndustryGeneral Liability Occurrence Loss Ratios

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Us p c primary industry commercial casualty losses vs us gross domestic product

US P&C Primary Industry Commercial Casualty Losses* vs US Gross Domestic Product

Over the long term, losses and GDP have grown at approximately the same rate.

Losses as a % of GDP grew in the soft market and declined since 2002.

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Umbrella average prices per million

Umbrella:Average Prices Per Million

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07

Source: Marsh


Three generic primary rate monitors

Three Generic Primary Rate Monitors

Individual Policy Comparisons at Renewal

Need to adjust for (lim, att pt, exposure)

Unable to adjust for mix of business

New vs Renewal

Rate per Exposure Metric for Homogeneous Segments

Homogeneous segments rare for Commercial Lines

Comparisons to Benchmark

Need detailed benchmark

Questionable accuracy by mix

Consistency over time

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Renewal business bias

Renewal Business Bias

Assumptions

Renewal Price Change-5%

New Business Price Change-25%

Renewal Retention 65%

Results

CalculatedActual

Annual price deterioration-5%-12%

Three Year Compound effect-14%-32%

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Renewal business bias1

Renewal Business Bias

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Technical issues

Technical Issues

Minimum Premiums

Limits/Attachment Points

What about capital charge differences

Exposure

Units: Auto vs GL

Primary Premium

Primary Expected Loss

D&O Market Value or Sales vs Market volatility

Schedule credits and debits

Experience mod/PH DIV/Retrospective rated

Rate increase vs “real achieved”

Risk Classification/Tier

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Systemic issues

Systemic Issues

Objectivity vs Subjectivity

New Business & Lost Business

Terms and Conditions

Underwriting risk selection and guidelines

Movement in a soft market from E&S to Standard market

Generally these items leverage and exaggerate calculated price movements

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Terms and conditions

Terms and Conditions

Correlates and leverages price declines in soft market

D&O – Entity Coverage

Umbrella – Aggregate Drop Downs

EPLI on GL/Umbrella policies for free

Extended reporting periods on prior acts for free

Multi year policies with cancellation option for free

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Reinsurer issues

Reinsurer Issues

Reinsurer needs to understand thoroughly primary rate monitor

Commission changes vs Premium changes – Reinsurer and Primary have different objectives

Measure against internal planning objective – alternate purpose

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Premium at present rates approach

Premium at Present Rates Approach

Works well for:

Personal Lines

Standard and Small/Medium Commercial Lines

Rates current in force book at last year’s and this year’s rate levels

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Sophisticated benchmark

Sophisticated Benchmark

Used for:

Reinsurance treaties

Large commercial Accounts

Individually analyzed and priced deals

Consistently parameterized individual account pricing model

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Sophisticated benchmark1

Sophisticated Benchmark

Need to measure actual parameters vs default parameters

Need to measure use of credibility against a standard

Experience vs Exposure rating

Experience years

Etc.

Interest Rate Movement

Subjective Issues

Underwriting/Risk selection improvement/deterioration

Terms and Conditions

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Reasons for having strong price monitoring

Reasons for having strong price monitoring

Input into reserving process

Input into corporate and strategic planning

Creates transparency on the pricing decisions and drives appropriate discipline

Price monitoring is important to reinsurers in the pricing process

Poor metrics will often be thrown out or tempered and replaced with more punitive defaults.

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


Governance the age of information

GovernanceThe Age of Information

On an individual account basis:

Record each pricing action/judgement

actual vs default parameters

credibility usage

Measure actual loss emergence vs expected

Measure actual loss payout vs expected

Measure actual premium pay-in vs expected

Measure actual profitability against expected

etc.

Price Monitoring:

A Governance Issue

CAS Ratemaking Seminar

3/8/07


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