Chris Nyce KPMG Senior Manager

1. CAS Ratemaking SeminarPrice Monitoring-Survival Strategies for a Softening MarketMarch 10, 11, 2005 Chris Nyce KPMG Senior Manager

2. Disclaimer • The views expressed in this presentation are those of the speaker; and • The are not necessarily the views of the CAS, KPMG, or any other sponsor of this seminar; • Anyone who says otherwise is not only wrong, but is itching for a fight.

3. Backdrop 2005 or Why Measure Pricing? • CAIB Pricing Survey shows prices are declining in last quarter • Soft market may be upon us • Yet BEST’s A&A shows 2003 Industry consolidated ROE at 9% is marginal even at the height of the cycle • Conclusion: Each company must be better than average to earn a return equivalent to peers in other industries

4. We Now Can Measure Price-So What Can go Wrong

5. What Can be Done - Considerations • No rate plan is bulletproof • Active implementation of that rate plan is key • Manual rates can be nearly irrelevant • Market rates are key, but manual plans need to include flexibility to achieve targets • Underwriters reacting to the market can defeat any rate plan, and often do • Achieving profits in a soft market is not easy, it’s hard • Average profit levels of insurers, even over a cycle, are below shareholders acceptable levels • Generic solutions don’t always work for specialty or excess large lines • But there is a way

6. Quality of Risk Within Class • Standard underwriting execution is key • Reasonable authorities and delegations • Data and risk validation • Field audit schedules • Self audit and management reviews • Strong field and home office referral processes • Audits should include data quality • Exposure information, coverage additions if not considered in the price monitor • Rating plan refinements may be needed • Any recognition of variation of loss cost within a rating segment is candidate for new rating variable • If no manual rating differential, needs to be segmented and tracked

7. Risk Quality by Class • Best solution: Equal rate adequacy in each class • But even if manual rates are equally adequate, charged rates may not be • Regulation, or filing difficulties may prevent achieving the perfect rate plan • Segmentation and tracking price by segment may be necessary • Need to consider existing off balances • Departures of charged rate from manual (think new vs. renewal) • Need to consider emerging threats • Mold, CD, waste for example

8. This Works for More Cases than you Think - Examples • Example 1: Excess Casualty (Re)insurance • Use benchmark approach • Establish pricing model, with pricing parameters such as LDF’s, excess factors, even manual rating built in • Measure new and renewal business as a percentage of manual • Example 2: Excess Property (Re)insurance • Examine CAT models to determine expected loss • Measure price to expected loss benchmark • Don’t forget risk margin • Inland Marine or Other Judgment Rated Risks • Measure benchmarks to schedule of ELP’s

9. Examples of Special Problems • What is part of the rating plan and what constitutes a departure • Schedule credits, IRPM’s are clear • What about experience rating, dispersion credits, company expense reductions, loss free discount • Characterize each factor as a coverage difference, or subjective rating • Is there real coverage associated with the factor? • Does the factor reflect an objective difference in loss/expense potential? • Is the rating factor commonly used to achieve target pricing • What coverage changes can be adjusted for, and which should not • Example, if mold exclusions are attached to all property policies in a renewal cycle with no price change, is that a rate increase?

10. Business is quoted by Underwriter (not issued) Monthly quotes Are issued to Agents/insureds Quarterly Reviews of Business Performed Price Monitoring and the Quote/Issuance Renewal Cycle Step in the process Practical Opportunity to Act On Price Monitoring Prices Measured When? Can influence underwriters to change quotes before issuance Can react to influence next months quotes Can react a quarter in arrears to influence prices Or just use to set ELR’s

11. Driving Price by Segment 2. Divide the book into a manageable number of segments (stratify into A,B,C, for example) 3. Get agreement on the price need by larger segments 4. Set up segmentation model to drive price achievement by segment, and communicate to all underwriters 1. Analyze book of business by overall rate need and by meaningful segment 5. Monitor, Measure, Report Deviations Drive Underwriting Quality Throughout the Process

12. Segmentation Approaches • Understand internal experience • Understand market experience • Suggest at collected level, not manual • If performing Premium on Level, must account for discretionary price changes • Understand market rate adequacy • Again at collected premiums, not manual • Rating Bureaus can be a decent source for this information

13. How are the Segments Defined? • Meaningful segments that company/underwriters manage • Common Examples • NAICS code • Class code • Program • Geographical region • Size of risk • Combination of the above

14. Business Drivers – Set Specific Targets • Price change on renewals • Price on new business to benchmarks • Renewal retention desired • Underwriting approach

15. Basic Implementation Model for Segmented Pricing Targets

16. Sample Action Grid for Underwriters and/or Agents

17. Sample Appetite Guide