THE TECHNICAL SIDE OF UNDERWRITING

1. THE TECHNICAL SIDE OF UNDERWRITING TRADITIONAL CASUALTY BUSINESS CARE Seminar Presented by Robin M. Williams Odyssey Re June 8, 1999

2. The Underwriter’s Goals • Primary: • Identify profitable risks where capacity given is consistent with the risk assumed • Secondary: • Select risks that further the risk takers' business strategy • Select risks that further relationships with cedants and/or brokers • Select risks that help raise the profile of the risk taker with respect to customers

3. The Actuarial Twist to Underwriting

4. Projecting Individual Risk Profitability • I tend to place more emphasis on statistics (IRR/ROE, loss ratio, combined ratio, expense ratio). • Almost every account is priced - very few exceptions. • Start Ups? Price by comparing to similar programs. For completely new coverages, research the exposures in order to project loss costs. • Aggregate portfolio statistics for management purposes.

5. Other Issues Affecting Profitability • In common with almost every underwriter I know, at Odyssey Re we look at:

6. The Primary Program • Is it profitable? We ask our actuarial department to help us evaluate this. • Primary management: Is it competent? • Does the business plan make sense? • Are the primary underwriters able to identify good risks, and charge enough premium for those risks? Do capacity decisions make sense? • Are the internal controls likely to be effective? How are MGAs controlled and monitored?

7. Expenses • Are primary expenses (which we are often asked to reimburse) reasonable? • If many entities are involved (e.g. MGA programs), are the various players taking too much money out of the premium in the form of fees? • Is the reinsurance brokerage reasonable?

8. Capacity: • Why does the primary program want the capacity? Do they really need it or is reinsurance a revenue source? • Is the capacity desired commensurate with the risk of the program? The concept of "balance." • Risk Loads. Is it possible to calculate an appropriate risk load for ANY limit/premium combination? In practice we find that theoretical surplus allocations need a reality check for the unusual situation. Even with an actuarial background, these sorts of discussions can be confusing.

9. Achieving Strategic Objectives • My responsibility: Specialty Casualty. E&O, D&O, Heavy Casualty, E&S Casualty, Umbrella, WC, A&H, Warranties • No finite, securitization, credit enhancements (except for some residual value). • Within this definition, we enjoy considering the unusual or new product and/or distribution system. • We avoid "class" underwriting - the tendency to reject a type of risk because of past experiences. Perhaps my actuarial background makes me more willing to attempt to evaluate the merits of each case. • Could actuaries sometimes be "too" willing to look at unusual risks? Can we have too much confidence in our analytical abilities?

10. Furthering Relationships with Brokers/Cedants • Adding value: • While most clients now have access to actuarial support, the analytical skills developed through actuarial training can sometimes yield insights about their programs valuable to our clients. • Of course, underwriters with different backgrounds will be able to contribute different sorts of value. Actuaries have no exclusivity in this area.

11. Making the Transition From Actuarial to Underwriting • No more day-to-day analytical work. There isn't time for it. But, actuarial training can be helpful because: • The underwriter can then help translate trends affecting a particular primary program into a form more susceptible to actuarial analysis. • The underwriter can better understand and critique the actuarial pricing analysis. • The underwriter may be better at vetting submissions initially (but this can be offset by a tendency to believe that every submission is doable with the right adjustments and pricing - thus being unwilling to decline anything).

12. Actuaries vs. Underwriters • The opposing institutional points of view. Both points of view are valuable. When you move to the underwriting side, it is important to take on the less conservative "underwriting" point of view. • My relationship with the actuarial department: Probably the most lively of any of Odyssey Re's underwriters.

13. The "Technical" Side of Underwriting? • A better phrase might be the "Analytical" Side of Underwriting. I believe this is the greatest strength that actuarial training brings to the underwriting function.