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Pricing Approaches and Considerations for Large Accounts CAS Ratemaking Seminar March 17, 2008 Panelists Mary Ann Krautheim - Client Strategy Officer, Construction Services Group, Aon Risk Services, Inc.

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Pricing Approaches and Considerations for Large Accounts

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  • Mary Ann Krautheim - Client Strategy Officer, Construction Services Group, Aon Risk Services, Inc.
  • Janet Lindstrom - Vice President, Large Account Actuarial, Arch Insurance Company
cas session synopsis
CAS Session Synopsis
  • The past decade has resulted in an increasing relevance of actuarial approaches in pricing large accounts. Considerations differ from traditional manual rating due to the need to consider individual risk characteristics, work closely with insurer and broker account executives, and tailor insurance programs to the risk appetite of the client.
  • This session will discuss these aspects including actuarial approaches to large account pricing, the account negotiation process, and controls that can be used to understand the impact of negotiated insurance programs on company results.
large account considerations for
Large Account Considerations for:
  • Building Pricing Model
  • Testing Pricing Model
  • Preparing Submission to Carrier
  • Individual Account Pricing
  • Account Negotiation Factors
  • Price & Program Monitoring
building the pricing model
Building the Pricing Model
  • Integrated Model or Separate by Component?
building the pricing model6
Building the Pricing Model
  • Who is the User?
    • Actuary or Non-Actuary
    • If Non-Actuary, how much should be displayed vs. behind the scenes (black box)
    • At what level and steps will judgments be selected
    • How will variations from Model Indicated be captured & measured
building the pricing model7
Building the Pricing Model
  • Who is the Customer?
    • Large Account through:
      • Growth of business over time
      • Merger/Acquisition or Roll-up
      • Migration to greater levels of self insurance
      • Captive creation
    • Single entity or group of several entities
building the pricing model8
Building the Pricing Model
  • Who is the Customer? (cont.)
    • Sophistication
      • Often employ own risk manager(s)
      • May employ own actuary
    • Separate Models for each Segment, or just vary parameters within one Model?
      • Construction
      • Transportation
      • Energy, etc.
building the pricing model9
Building the Pricing Model
  • Who is the Customer? (cont.)
    • What are they looking for on the Risk Transfer Continuum?

Least Risk Most Risk

Guaranteed Cost Small Ded Retro or Large Ded Self Insured Retention Captive

    • Layer Cost
      • Predetermined through Premium or
      • Variable based on actual loss
building the pricing model10
Building the Pricing Model
  • What Lines will Carrier Provide for Large Accounts?
    • WC (Medical vs. Indemnity)
    • GL (Prem/Ops vs. Products/CO)
    • Auto (Liab vs. Phys Dam)
    • Property (Perils; Cat; Inland Marine; Builders Risk, etc)
    • Medical Malpractice
    • Professional Liability
    • Umbrella/Excess Liability
    • Etc.
  • How will coverage additions/exclusions be handled?
building the pricing model11
Building the Pricing Model
  • What Program Options will Carrier Provide?
    • Guaranteed Cost
    • Small Deductible – determine the split between Small and Large deductibles, considering:
      • Bureau deductible definitions and rating plans
      • Collateral charged
      • Claims Handling and Reimbursement processes
    • Large Deductible
    • Retro
    • Self Insured Retention (SIR)
building the pricing model12
Building the Pricing Model
  • What Additional Options Will be Available?
    • Clash – single retention per occurrence across multiple lines
    • Captives
    • Multi-leveled retention – such as:
      • Corridor Deductibles
      • Swing Plans, etc.
  • Priced inside main model or in separate tools?
  • Simulation - Will it be used, and where?
building the pricing model13
Building the Pricing Model
  • Major Pricing Components:
    • Exposure Rating
    • Experience Rating
    • Loss Layering
    • Credibility to Combine Experience & Exposure Rates
    • Expense & Profit
    • Other Program Components
building the pricing model14
Building the Pricing Model
  • Exposure Rating (Manual Rating)
    • Sources
      • Rating Bureau Rates or Loss Costs
      • Proprietary Segment Specific Rating
      • Underlying Carrier Pricing
    • Balancing Scope of Exposure Rating with expected Credibility of Accounts
    • Determine how variability within a class will be handled
building the pricing model15
Building the Pricing Model
  • Experience Rating (Loss Rating)
    • Loss Detail Entered
      • All Individual Claim Detail or Total Loss & Large Losses
    • Non-annual policy periods – Impact on Trend & LDFs
building the pricing model16
Building the Pricing Model
  • Experience Rating, cont.
    • Loss Cap & Working Layer - Determine Philosophy
      • Similar to:
        • Experience rating plans – with emphasis on frequency, or
        • Loss rating plans - to incorporate larger working layer
      • Relation to Retention –
        • Only less than Retention, or
        • Set regardless of Retention
      • Relation to Credibility –
        • Set to generate stability within layer or
        • Allow Credibility to take stability into account for each layer
      • What Large Loss Threshold will be required for data entry?
        • Should be at least all claims > de-trended loss cap and/or de-trended lowest layer used in layering
building the pricing model17
Building the Pricing Model
  • Experience Rating, cont.
    • Parameters –
      • Types
        • Trend – Loss & Exposure
        • Benefit Level Adjustment Factors (BLAFs)
        • Development - Loss & Claim
        • Interest Rates, etc
      • Sources, where applicable
        • Bureau filings or exhibits
        • Industry studies
        • Competitor Filings
        • Proprietary data
        • Credibility-Weighted Account Specific
      • Decisions
        • Dimension - Countrywide, regional, state, etc
        • Incorporating differences in development patterns – industry vs. company vs. TPA
        • Timing of updates
building the pricing model18
Building the Pricing Model
  • Credibility
    • Determine basis
      • # Claims
      • Exposure bases
      • Loss volume
      • Variability of data
        • Depends upon how much loss data provided:
          • Variation between years for all situations
          • Variation within each year only if all individual claim detail (ground up) provided
      • Combination of above bases
      • Other
    • Determine Application
      • Only to Limited Loss, or
      • By Loss Layer
building the pricing model19
Building the Pricing Model
  • Loss Layering
    • At what levels will layering be done?
      • Loss Cap
      • Retention Options
      • Excess layers – and determine:
        • Who enters the layers
        • How many layers will be displayed
    • How will loss be layered?
      • ILFs or ELFs from Rating Bureaus
      • Proprietary severity distributions by line, segment, hazard group, etc.
      • Credibility-Weighted Account Specific loss distributions
building the pricing model20
Building the Pricing Model
  • Loss Layering, cont.
    • At each layer, what will be displayed?
      • Exposure Rated
        • Using the various exposure rate methods
      • Experience Rated
        • Actual loss
        • Trended and/or Trended & Developed
        • Burning Cost (Trended, Developed, and Exposure-Adjusted)
      • Credibility-Weighted
      • Reinsurance Impact
      • Other
building the pricing model21
Building the Pricing Model
  • Expense & Profit
    • Commission
    • Claim Handling Expense
      • In-house or TPA
      • Who is collecting and paying
      • Does income on balance accrue to customer or carrier
    • Fixed & Other Variable Expense – as affected by:
      • Lines of business
      • # Policies
      • Program Structure, etc.
building the pricing model22
Building the Pricing Model
  • Expense & Profit, cont.
    • Taxes & Assessments
      • Premium Based
        • State Premium Taxes
        • Assessments
        • Surcharges
      • Loss Based Assessments (LBA)
        • Set (fixed) on expected level, or
        • Passed through on actual loss or premium
          • Fixed Rate
          • Variable Rate
      • Premium and Loss Basis Definitions
        • Differ between each assessment
        • Surcharges before/after deductible credit
building the pricing model23
Building the Pricing Model
  • Expense & Profit, cont.
    • Other Program Components
      • Payment Options (Pay Plans)
        • In Total or by Pricing Component
        • Preset pay plans only, or are custom plans allowed
        • Cash flow implications
      • Collateral
        • What forms will be acceptable to carrier
        • What timing will be involved
        • Where will income from balances accrue – carrier or customer
building the pricing model24
Building the Pricing Model
  • Expense & Profit, cont.
    • Profit and/or Permissible Loss Ratio –
      • For book or by account (based on account’s own qualities and payment streams)
      • Within or outside of pricing model
      • What will capital allocation be for large accounts
      • What methodology will be used to determine needed profit and risk load
testing the pricing model
Testing the Pricing Model
  • Once Model has been built – to test it:
    • Sample Outcome - Between Models
      • Representative sample of accounts or entire book
      • Impact of changes (between previous model or model editions)
    • Sensitivity Testing - Within Model
      • Changing Parameters
      • Changing Selections
    • Other
individual large accounts
Individual Large Accounts
  • Once model is built and tested, Lifecycle for individual large account is:
    • Financials
    • Understanding Carriers’ Appetites
    • Understanding Customer
    • Submissions to Carrier(s)
    • Individual Account Pricing
    • Negotiation
understanding the customer
Understanding the Customer
  • Enterprise Risk Management for Customer
    • Total Cost of Risk
      • Balance Sheet
      • Off-Balance Sheet
    • Risk Aversion vs. Risk Affinity
    • Historical Data vs. Future Plans vs. Market
    • Choice of Where to Invest
      • Premium
      • Risk Control
      • Claims Management
    • Control vs. Lack of Control
  • Result - Program Structure(s) Requested in Submission to Carrier
account pricing considerations
Account Pricing Considerations
  • Once submission received and entered into model – individual account pricing considerations are:
    • Exposure Rating
      • Impacts to base rate and/or severity distribution if:
        • Individual account loss exposure in upper or lower end of a class
        • Not all hazards have been covered in exposure rating
        • Significant change in risk position over time
account pricing considerations29
Account Pricing Considerations
  • Experience Rating
    • Data Issues
      • Evaluation dates more than a few months from effective date
      • Lack of first dollar loss and claim counts
      • Incomplete ALAE information
      • Lack of claim counts for claims closed without payment
account pricing considerations30
Account Pricing Considerations
  • Experience Rating, cont.
    • Fundamental Change in Risk
      • Coverage – history or upcoming policy period
      • Risk Management Protocols
      • Mergers & Acquisitions; Roll-ups
      • Sale of an Entity
      • Mix of Business
account pricing considerations31
Account Pricing Considerations
  • Experience Rating, cont.
    • Data Validation
      • Understand data received
      • Ensure it ties between data sources
    • Diagnostics
      • Patterns in large losses
      • Paid ALAE/Paid Loss (is account or claim handler more likely to settle or hold)
      • Paid/Incurred Loss & ALAE (to help determine if under-reserved)
account pricing considerations32
Account Pricing Considerations
  • Experience Rating, cont.
    • Loss Rates
      • Steadily increasing or decreasing?
        • Too strong/light trend factors, or
        • Possible underlying changes in:
          • Mix of business
          • Claims handling (have appropriate LDFs been used?)
account pricing considerations33
Account Pricing Considerations
  • Experience Rating, cont.
    • Loss Rates, cont.
      • Cutoff point – like two different accounts?
        • Significant change in account management or claim handling practices, or
        • Incorrect BLAF
      • Frequency or Severity increasing or decreasing
      • As Loss Cap is raised, how volatile do loss rates become
account pricing considerations34
Account Pricing Considerations
  • Experience Rating, cont.
    • Loss Layering
      • Credibility by Layer
      • Burning Cost vs. True Exposure to Loss
account pricing considerations35
Account Pricing Considerations
  • Expense & Profit
    • Accurate Fixed Expense Load
      • When models at different “levels” than policy issuance or loss sensitive adjustment process - consider actual fixed expense expected
    • Claim Handling
      • In-house Cost
      • TPA Fees
      • Loss Conversion Factor (LCF)
account negotiation factors
Account Negotiation Factors
  • Once quote sent by carrier, specific negotiation factors are:
    • Total Cost of Risk
      • Risk Control
      • Variable Cost
      • Loss Pick
      • Max
      • Taxes
    • Types of Risk
      • Terrorism
      • Climatic
      • Political
      • Economic
account negotiation factors37
Account Negotiation Factors
  • Once quote sent by carrier, specific negotiation factors are: (cont.)
    • Qualitative Factors
      • Ancillary Services
      • Stability of Carrier
      • Cost of Claim Handling
    • Loss Scenarios
      • Best
      • Mid
      • Worst
documenting program
Documenting Program
  • Once quote is bound, program should be fully documented
    • Why –
      • Changes will occur
        • Merger/Acquisition in Customer or Carrier
        • Underwriters
      • If not documented well, risk to carrier and customer
    • Closeout vs. holding liability on balance sheet
price program monitoring
Price & Program Monitoring
  • Benefits to Carrier, Broker & Customer
  • Possible Types
    • Renewal Rate Change
    • Benchmark Monitoring
    • Aggregate Retention Erosion
    • Other
  • Possible Summary Levels
    • Line of Business
    • Program Structure Type
    • Underwriter
    • Pricing Actuary
    • Region
    • Account
price program monitoring40
Price & Program Monitoring
  • Standard adjustments needed for change in:
    • Exposure level & type
    • Limit(s) – policy and sublimits
    • Retention(s) – occurrence & aggregate
    • Mix of business – state, class, etc
    • Policy term length
    • Coverage additions or exclusions
  • Outcome – Ability to track change in large account pricing and program structures from specific date and or rate level for new and renewal business