2007 CAS Ratemaking
Seminar
Market Cycle Management: Blunt & Straightforward
Mark Lyons Keynote Address
Support Slides
Unless otherwise noted, slides have been sourced by the presenter
PICC Your Battles
Passion
Intuition
Courage
Credibility
In 2005, Robert Hartwig asked this group:
Who’s to Blame for Problem Pricing?
1.
Actuaries
2.
Senior Management of Company
3.
Your Underwriting Department
4.
Your Marketing Department
5.
Regulators
POGO: “We have met the enemy and he is us.”
Insurance Cycle Terminology
Expansion
Competitive Phase
Contraction
Re-underwriting Phase
Soft
Market
Hard
Market
Peak
‘83
’84
‘85
‘86
‘87
*Includes Investment Income
‘88
‘89
‘90
’98
’99
P
O
S
I
T
I
V
E
Peak
’00
’01
Profit*
’02 ’03
Crunch
Thomas Stamm, NAPSLO Collegiate Symposium, April 1, 2006
N
E
G
A
T
I
V
E
Strength of Recent Hard Markets by NWP Growth
[2006 to 2010 figures are Insurance Information Institute forecasts]
1975-78
25%
1984-87
2001-04
20%
15%
Current $
10%
5%
0%
Real $
-5%
2005: biggest real drop in
premium since early 1980s
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006F
2007F
2008F
2009F
2010F
-10%
Better View than Calendar Year Combined Ratios or Operating Income
Note: Shaded areas denote hard market periods
A.M. Best, Insurance Information Institute
300
275
250
225
200
175
150
125
100
75
50
25
0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Combined Ratio
Many Sub-Cycles Occurring within ONE Underwriting Cycle
Year
Product A
Product B
Different cycle lengths, different rates of improvement and deterioration
Some lines are heavily correlated; others only slightly
Impact of the Insurance Cycle on
Transaction Variables and Underwriting
Soft Market
 Information ↓
 Coverage ↑
 Pricing ↓
 Attachment Points ↓
 Capacity/Limits ↑

Underwriting ↓
Hard Market
 Information ↑
 Coverage ↓
 Pricing ↑
 Attachment Points ↑
 Capacity/Limits ↓

Underwriting ↑
The Complexity of Comparison
Insurers Differ Strategically on their Approach towards:


Target Markets
Distribution Channels
 Cross-sell leverage
 Diversification strategy
 Rating agencies and regulators
 Market share versus Margins Philosophy
 Incentive Compensation
 Cost structures
 Use of reinsurance/capital markets
 Capital management strategy
 Wall Street; quarterly versus longer-term
 Shareholder expectations
 Other variables
Top Ten Casualty Actuarial Stories of 2006 (per February 2007 Actuarial Review)
1 – Companies continue to sort out what ERM means
1 - Back end
2 – SEC questions reserve ranges/variability
2 - Back end
3 – Continued pressure on audit firms for more critical
review of actuarial work
3 - Back end
4 – P/C Cat models continue to evolve
4 - Both
5 – Use of predictive modeling spreads to smaller
personal lines carriers & small commercial lines
5 - Both; mostly internal
6 – Casualty softening market continues
6 - Front end
7 – Finite reinsurance probes continue
7 - Back end
8 – Risk transfer initiatives: bifurcation not likely to pass
8 - Back end
9 – Federal judge rules that flood exclusions do not
apply to 2005 levee breaks
9 - Front end (full circle);
partial impact though
10 – Hard market for property cat risks driven by
changes in pricing models and capital requirements
creates alternative capacity (cat bonds; side cars)
10 - Both; mostly internal
Executive Assurance “Proxy” Other Liability Claims Made
Combined Ratios and ROE
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
Economic ROE
160
140
120
100
80
60
40
20
0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Combined Ratio
OLCM Accident Year Combined Ratio and ROE, 1990-2005
Accident Year
Combined Ratios - OLCM
Economic ROE
Source: Industry Annual Statements, Schedule P and Bernstein Research, August 2006
Tillinghast Annual Price/Limit Indices – D&O
Tillinghast Industry Price/Limits Perspective
1800
1600
1400
1200
1000
800
600
400
200
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
0
Tillinghast Price Index
Tillinghast Limits Index
Tillinghast Implied Price Per Million Changes –D&O
Tillinghast Industry Price Per Million Changes
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
-20.0%
-30.0%
-40.0%
Price Per Million CHANGES
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
-10.0%
1987
0.0%
Marketplace: EA Competitor Results
COMPETITOR BOOKED GROSS RESULTS @12/31/2005
225.0%
200.0%
Loss/LAE Ratio
175.0%
150.0%
125.0%
100.0%
75.0%
50.0%
25.0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Accident Year
Source: Competitor Group 2005 Annual Statements – Schedule P
Marketplace: 6 EA Competitor Summary
6 Competitor Viewpoints
160%
140%
120%
100%
80%
60%
40%
20%
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Accident Year
AVG LR
Standard Deviation
CV (Coefficient of Variation)
•Underwriting DOES matter
•NONE of above Competitors would have made a 15% ROE from 1999 – 2002!
•Redefine “SUCCESS”
PICC Your Battles
Passion
Intuition
Courage
Credibility
Examples of Business Value Added:
PASSION, INTUITION, COURAGE and CREDIBILITY
Transaction & LOB Actuaries
* Make decisions! Make a difference! Be counted on to be a
valuable contributor!
* Variability is extremely important but you need to be in the
shoes of the underwriter; align with time pressures; wide ranges
provide little value
* Follow up with UW to see what happened to the quote – show
you care, are part of the team & deserve to be notified
* Meet w/UW managers & supervisors to get a better “feel” and
varying perspectives
Transaction & LOB Actuaries (Continued)
* Read actual policy files – stay late – learning doesn’t stop when the
exams are completed
* Insist on a full underwriting submission – NOT JUST LOSS
EXPERIENCE
* Don’t get “brokered” by an underwriter as to the information
supplied
* Know what stage of the Underwriting Cycle this Profit Center is in
* Be “Universal Translators” (for the Star Trek fans in the audience)
Actuarial Managers/Actuarial Executives
* Insist that your actuaries develop critical business skills
* Minimize “not my job” syndrome
* Consider putting your staff physically with UW units
*Get involved in Risk Management endeavors
* Where appropriate set up cross views by Business Division and
Product within Actuarial
*Reserving Actuaries need to meet with UW as well; don’t shut them
off and only have Pricing Actuaries communicate
Actuarial Managers/Actuarial Executives
(Continued)
*Adopt effective Meeting Management behaviors that support
cycle management
* Managers need to provide referral points and escalation points to
their actuarial staff no different than underwriting units do
* It’s important to begin soft market management at the transaction
level; being flexible on marginal deals and being strong and
forceful on unprofitable deals. Your line actuaries need to know
that they have your support if and when this is escalated over their
heads to you.
* Don’t become solely the “Premium Prevention Unit”
Actuarial Executives/Chief Actuaries
•Stand up and be counted – THIS IS MOSTLY A PROMOTION
TRANSITION ISSUE – You are the final stop. The buck stops here!
•Need to maintain professional distance
•Important to identify with management rather than your employees;
you ARE management
•Seek out Business Unit executives who themselves are (were)
actuaries
* One key objective of the Chief Actuary in a soft market should be
to become UNPOPULAR
Actuarial Executives/Chief Actuaries (Continued)
* Need
to alert Senior Management, quantitatively, just how
profitable and unprofitable the subject lines of business have
been historically over all points of the Cycle
Other Liability - Combined Ratios
Average Combined Ratio 1995-2005 = 116.1
138.6
122.6
124.4
117.6
112.3
111.8
110.5
108.5
114.4
112.1
104.5
95
96
97
98
99
00
01
02
03
04
05
A.M. Best; Insurance Information Institute
Marketplace: Casualty Competitor Results
[as of December 31, 2005]
Competitor Occurrence Casualty Gross LR Results
Loss/LAE Ratio
160%
140%
120%
100%
80%
60%
40%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Accident Year
AIG
Chubb
Zurich
ACE
XL
St Paul/Travelers
Hartford
Fireman's Fund
Source: Competitor Group 2005 Annual Statements – Schedule P
•The cycle will swing back
•Insurers’ results will deteriorate
Paradoxes:
•All companies have the “best underwriters
in the industry”
•Underwriting makes a difference •All companies are “better than average”
Excess Liability Market Capacity
[in Billions]
$2.011
$1.941
$2.045
$1.721
$1.570
$1.540
$1.710
$1.575
$1.432
$1.334
$1.405
$1.425
Capacity dropped 30% from 2000 to 2003
but has since increased by 10.2%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2005 Limits of Liability Report, Marsh, Inc.
Marketplace: XS Casualty Industry
Historical “Known” Loss/ALAE Ratios
M
A
R
K
E
T
C
Y
C
L
E
Policy
Year
West
Coast
Capacity
XS
Carrier
West
Coast
MGU
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
310.7%
254.9%
53.8%
39.1%
23.6%
28.5%
42.1%
58.5%
63.0%
86.0%
89.6%
68.2%
6.8%
9.6%
76.2%
63.9%
67.6%
121.6%
175.7%
233.9%
270.9%
321.0%
249.2%
31.0%
5.1%
Valuation
@12/1989
@12/1989
Large
Stock
XS & Umb
Book
256.3%
221.7%
101.8%
85.1%
35.6%
23.8%
28.9%
103.2%
104.8%
195.2%
67.7%
28.4%
0.9%
@12/1986
Large'
Surplus
Lines
XS & Umb
Book
146.6%
61.1%
50.2%
20.0%
16.2%
35.5%
106.0%
49.6%
31.8%
@12/1984
Surplus
Lines
Buffer XS
Book
35.9%
32.1%
53.7%
69.4%
119.2%
174.6%
140.1%
118.0%
44.4%
23.0%
25.7%
31.9%
30.1%
16.7%
@6/1991
Arch, November 2, 2006
Hard
Market
Hard
Market
Actuarial Executives/Chief Actuaries (Continued)
* Set up a clear basis with Senior Management (of which
YOU are a part) as to how the business will be routinely
viewed
•Set up a clear set of analytics with Senior Management that
leverages this data organization basis
[LEADING INDICATORS]
Actuarial Executives/Chief Actuaries (Continued)
LEADING INDICATORS
oRisk Selection - Hit Ratios
oTerms and Conditions
oPrice Monitors
oChanges in Portfolio Mix
oRenewal Retention
oReturns of the Business
oCommission Rates
oUpdate Returns Quarterly
RETROSPECTIVELY AND
PROSPECTIVELY FOR THE
NEXT ROLLING TWO
POLICY YEARS.
Communicate graphically!
oNew / Renewal Business Mix
oAdmitted / Non-Admitted Mix
oLoss Trends
Leading Indicators: Risk Selection
* Hit Ratios
Need to be viewed as a time series & best if done on a Policy
Quarter basis (not Calendar Quarter)
Also meshes with other Leading Indicator’s data organization
Critical to be done separately for New versus Renewal Business
Renewal business should have higher hit ratios
>New business, in a softening market, will be where
most deterioration lives
>New business will be “bought” either by price, T&C,
expanded capacity, lower attachment points, expanded
services, higher commissions
Critical since most carriers measure renewal rate change only –
underwriters know this & drive new business knowing that the
measurements are delayed until first renewal – masks true state
Leading Indicators: Risk Selection (Continued)
* Quoted to Submitted – “triage”, risk appetite validation, %
deemed attractive enough to quote; can be indicative of changing
risk selection standards, changing marketplace messages, better
producer management efforts
* Bound to Quoted – success rate given that it was quoted; can show
changing pressures in the marketplace
* Bound to Submitted – the product of the above two; ultimate
measure of success-to-activity; can be a masked result similar to a
pure premium trend versus that of frequency and severity separately
* Sheer volumes of submission, quote, binder
Staffing models
Verification of Risk Appetite messages to marketplace
Been largely ignored by actuaries – too simplistic?
Leading Indicators: Price Monitors
Needs to be a continually updated time series
Need for Renewal business and New business for all material sectors of the book
Renewal business (from basic to sophisticated)
→Average Policy Premium
→Price Per Million (PPM)
→Price per unit of exposure
→Effective Rate Change
Exposure, policy term, limits, attachment/deductibles, layer %
Coverage mix changes, endorsement grants, defense costs
→Acknowledgement that some products cannot be accurately measured
→Compare “apples to apples” with “normalized” and explain any differences
→Know how much of the renewal book the monitors represent
→Consider giving field underwriters online tools so they can more effectively
choose between alternatives AND not get disadvantaged by brokers
asking for multiple quote options
Leading Indicators: Price Monitors (Continued)
Important to have multiple measures both internally and
externally produced (these are Renewal oriented)
→CIAB – view of the producers via survey
→Tillinghast – view of the carriers via defined survey
→Advisen / RIMS – view of the customers via survey
→Marketscout – view of a producer aggregator via data and
survey
Know their gathering and sampling approaches
Reconcile external indications with internal indications
Use as probe with underwriting units
Leading Indicators: Price Monitors (Continued)
New Business (from basic to sophisticated)
→Expiring pricing/terms are suspect and not easily verified
or subject to audit
→Price per unit of exposure
→PPM
→New business relative to Renewal business in defined
clusters
Establish benchmarks from bureau information,
company manual rates, loss rating indications,
credibility weighted – theoretically sound but
practically difficult
Need to maintain BOTH premium change monitors &
effective rate change monitors
MarketScout Commercial Price Report
www.MarketScout.com
Average Premium Trend by Line of Business
www.MarketScout.com
Average Commercial Rate Change by Line - CIAB
Commercial accounts trended
downward from early 2004 to
mid-2005 though that trend
moderated post-Katrina
Council of Insurance Agents & Brokers
Marketplace: CIAB D&O Insights (EA)
Leading Indicators: Renewal Retention
→Key component of ongoing profitability
More familiarity with renewal accounts
Cheaper to secure since most effort expended on gaining
the account originally as New Business
→Should be viewed on both a Renewal Premium basis and a
Renewal Count basis
→Be mindful of the “Count” mechanism; policy or Account
based; policy retention can drop with Account retention staying
flat due to changing layers or # policies per Account;
consistency is the key
→Further retention views by “Renewal Loss Ratio” can help in
ascertaining whether the Renewal LR will be lower than the
New Business LR
→Can aid in commission strategy as softening market puts
pressure on commissions
Leading Indicators: New /Renewal Mix
→Fundamental that New Business and Renewal business should
conceptually have the same Ultimate Loss Ratios (ULR) at ONLY
the apex or nadir of that product’s cycle
Softening Markets – New Business should have higher LRs
than renewals
Hardening Markets – New Business should have lower LRs
than renewals
→Knowing the New/Renewal mix is critical for profitability,
reserving, and operating action
→Can aid in determining strategy beyond “continuing to hit Plan” or
overall grow/shrink decisions
→Helps with relative mixture of New / Renewal growth or deceleration year-by-year SEPARATELY for new versus renewal
→Demonstrated metrics and management here also permits more
flexible and creative reinsurance arrangements
INSURANCE OPERATIONS – Market Cycle Management
Graph of Economic Return by Policy Year (and Policy Quarter)
N
35%
P
V
or
70%
Maximize
Writings
Maximize
Writings
25%
15%
Slow
Writings
R
Increase
Writings
5%
O
Minimize New
Business Writings
E
(5%)
C
O
M
80% B
I
N
90% E
D
R
100% A
T
I
O
110%
Focus on Best
of Renewals;
need at least
minimal market
presence
Policy Years
Graph projections driven by estimated rate changes, loss cost trends, other “leading indicators”
Leading Indicators: Commissions
oCommission Rates
Can be used within an overall economic review or can be
integrated as part of the price monitor process; either way is fine
as long as consistency is maintained and definitions are clear
Reflects the changing impact of the net true “cash received”
perspective
Producers attempt to increase commission rates at the worst
possible time for insurers in order to keep THEIR top line
growth flat
Insurers then feel the double whammy of lower prices &
increased “net” of producers
On the other side, Ceded side, pay attention to whether
facultative cessions are being bound and coded net of ceding
commission – big effect on ceded LRs
Leading Indicators: Admitted/Non-Admitted
oAdmitted/Non-Admitted Mix
Comes down to who is responsible for collecting and
submitting associated taxes
→Admitted – needs to be charged within the quoted
premium and remitted to authorities by insurer
→Non-Admitted – is not charged within quoted premium
and is collected and remitted to authorities by the Surplus
Lines broker
Generally speaking, this is about a 3% rate cut, all else being
equal, when renewing from a non-admitted basis to an
admitted basis
Leading Indicators: Loss Trends
Frequency
Severity
Pure Premium
Reconcile internal versus external data indications
Primary versus Leveraged Excess Trend
Important to communicate the incremental “ground” that is
being lost each quarter
Again, can be included as part of the effective rate change or
instead be within an overall economic analysis
I prefer loss trend to be OUTSIDE the effective rate change
calculation; this is more straightforward to communicate to
Underwriting rather than being clouded/obfuscated by loss trend
Industry Pricing and Loss Trends @ 12/31/2006
Sources: CIAB Pricing Surveys, ISO, NCCI
Umbrella
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
2001Q3
2001Q4
2002Q1
2002Q2
2002Q3
2002Q4
2003Q1
2003Q2
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
20.0%
Pricing or Loss Trend Change
25.0%
2001Q3
2001Q4
2002Q1
2002Q2
2002Q3
2002Q4
2003Q1
2003Q2
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
Pricing or Loss Trend Change
Commercial Auto - Primary
Effective Date of Policy
EEffective Date of Policy
Loss Trend (Freq & Severity)
Loss Trend (Freq & Severity)
Pricing Changes
Workers' Compensation
20.0%
10.0%
0.0%
-10.0%
-20.0%
Effective Date of Policy
Loss Trend (Freq & Severity)
Pricing Changes
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
2001Q3
2001Q4
2002Q1
2002Q2
2002Q3
2002Q4
2003Q1
2003Q2
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
30.0%
Pricing or Loss Trend Change
40.0%
2001Q3
2001Q4
2002Q1
2002Q2
2002Q3
2002Q4
2003Q1
2003Q2
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
Pricing or Loss Trend Change
Commercial Property - Primary
50.0%
Pricing Changes
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
Grand Tota
LOB
Effective Date of Policy
Loss Trend (Freq & Severity)
Pricing Changes
Percentage
Quarter
2001Q3
2001Q4
2002Q1
2002Q2
2002Q3
2002Q4
2003Q1
Leading Indicators: Change in Portfolio Mix
* Can indicate where your Business Units are having increased
success and having trouble
* It’s our & management’s job to determine whether we should “push
down the gas accelerator” on some LOBs and “hit the brakes” on others
* Reductions in some LOBs may be more a function of services
(Claims, premium audit issues, deductible issues, collateral issues,
risk engineering issues) and may not necessarily imply a market
below Return thresholds
* Forces another review of whether the emerging mix of business
meeting economic and strategic objectives
* Can alter your view of net retentions, reinsurance programs, upfront
capacity usage, attachment points, and the extent of services rendered
Leading Indicators: Returns of the Business
NPV Margin – % present value ‘profit/loss’ of present value premiums
ROE – same as NPV but related to allocated equity and includes
interest income from equity
ROC – same as ROE but related to all capital allocated (eqty, debt, hybid)
All three can co-exist but one needs to govern
→Best done on an UW Year or Policy Year basis (i.e.
“Decision Year”); cleanest implementation and
communication approach
→Accident Year can’t DIRECTLY relate to UW action
Call for all insurer’s measures to reflect risk-free interest rates ONLY
to stall any desires for cash flow underwriting (even capped rates if
Treasuries go uncharacteristically high due to inflation)
Leading Indicators: Returns of the Business
Senior Executive decision-making and communication can be
separate from communication necessary for line-of-sight execution
→Demand sophisticated Senior Management views for
broad decision-making
→Demand simpler Product Line and Region/Office goals,
standards, and thresholds
Speak in clear traditional “line of sight” language; rate
change, premium change, loss ratio, combined ratio
Leading Indicators: Returns of the Business (continued)
Extend the return measures reasonably into the future by Policy QTR
→Let’s you see WHEN established return thresholds may be
pierced; creates another measure for meetings and action – TIME
→Update these reviews quarterly as Leading Indicator information
& marketplace dynamics are clearer; make expense, reinsurance
and capital management assumptions
Company X - Return on Capital Forecast by Underwriting Year
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
2005
2006
2007
2008
-5%
-10%
Division 1
Division 2
Division 3
Division 4
Division 5
Division 6
Division 7
Total Company
Discussion of Priority Order of Individual Risk Softening Market
Impacts
1st - Risk Selection
2nd - Terms and Conditions
3rd - Attachment Points and Capacity Usage
Can be others
4th – Price
What??? Have you lost your mind???
Measure each:
Risk Selection – we’ve discussed – 1st above
Pricing – we’ve discussed – 4th above
Attachment Points & Capacity Usage – next slide
Terms and Conditions – next slide
Discussion of Priority Order of Individual Risk Softening
Market Impacts (Continued)
Attachment Points/Capacity (Limits) – we’ve only implicitly discussed these
within the effective rate change calculation
Needs a quarterly portfolio monitoring
→Shifts of capacity upward can get “lost” if only reflected within
effective rate change calculations
→The appearance of effective rate change trade-offs when higher
limits are provided is where the ILF curves are weakest (i.e. bigger
blocks at higher attachment points)
→Allows explicit questions to be put to underwriting executives
→Important to know if XOL treaties are being utilized as intended
→Underwriters often drop attachment points to ensure that their
premium goals are met (i.e. “close your eyes and pray for
miracles”)
→If the measurement is for deductibles rather than attachment
points, a measure of portfolio credit risk needs to be made as well
Discussion of Priority Order of Individual Risk Softening
Market Impacts (Continued)
Terms and Conditions – this represent coverage changes whether
granted by form or endorsement; extremely hard to measure
Recommend isolating KEY coverage areas and monitoring
frequency of use
Can be accomplished via sampling, automated binder
issuance or policy issuance systems, reinsurer audit reports
Participate on Corporate UW audits and/or read their reports
Need to involve the Claims department and develop
approximate Loss Ratio impacts of these key coverage grants
or retractions
Some measure should be included even if a SWAG – no
mere clarifying footnote will overcome the lack of inclusion
of form deterioration in projected LRs
Market Cycle Responsibilities of Senior/Executive
Management
Clear communication of WHAT CONSTITUTES SUCCESS
Repeatedly communicate to the Company at large the importance of
Cycle Management and that of Margins over Top Line Revenue
Make Market Cycle Management a key component of UW
Executive Performance Objectives
Align Incentive Compensation directly with Underwriting return
measures
Corporately highlight and encourage both ends of the spectrum:
Home Run Deals AND “Golden Glove” plays; must be true to the
culture and behavior desired
Market Cycle Responsibilities of Senior/Executive
Management
Demonstrate action and not just words; communicate this alignment
Make the difficult decisions that we’re paid to make
Look for new markets, new methods of distribution, and new
innovative products
Develop tools for both seasoned and young underwriters to manage
the Cycle
Influence the structure of Board Committees
Additional Feedback Loops about the Market Cycle
Scheduled Business Reviews /
Profitability Reviews of all
major UW units
Business Unit UW Audits
Corporate UW Audits
Changes in UW Authority
Delegation or UW referral
thresholds
Reinsurer Audit Reports
Reinsurance Market
approach to treaty renewals
and facultative support
Requested changes to UW
aspects of IT systems
Frequency of binder “halts”
on approved u/w authority
Internal Audit Reports
Risk Management Reports
Claims Audits / TPA Audits
Monthly Executive Reports
and Calls
oProfit Center Executives
oRegional Executives
Claims Large Loss & Cause
of Loss Meetings
Trade magazines and studies
Arch Insurance Group
Softening Market Strategic Decision Process
Quarterly Monitoring & Business Review/Profitability Meeting Topics
QUANTITATIVE INPUTS



Hit Ratios – Selectivity measures
Distribution churn
Price & Rate Monitors:
 PPM or Per Exposure – Absolute measures
 Renewal Change – Relative measures
 Loss Trend – minimal rate change needed to stay even
 Renewal Retentions – business & channel continuity
measure
 Mix: New vs. Renewal – additional profitability
measure since new business generally has lower
pricing or T&C
 External Industry Pricing Benchmarks
 Booked Competitor Results +/- Reserve
Announcements
 Audits: U/W, Financial, Internal Audit, Reinsurers
 Claims Department meetings on Severity & Frequency
 Risk Management Concentration Reviews
QUALITATIVE INPUTS










Business Division anecdotes
Marketplace dynamics
Competitor observations
Terms/Conditions appraisals
Broker feedback
 commission actions
 anecdotes
Reinsurer feedback
 audits
 anecdotes
Claims audits / TPA audits
Historical cyclicality of Product line
Assessment of U/W talent to industry average
Supply & Demand; market dislocation
opportunities
REINSURANCE MARKETPLACE INPUTS






Availability of Q/S and XOL capacity generally
Degree of support for Arch products specifically
Terms and Conditions imposed
Intermediary feedback
Booked Reinsurer Results +/- Reserve Announcements
Desired net position given the above
OUTPUT: MANAGEMENT ACTIONS

Growth or Contraction of Product
 Premium margins
 Commission strategy
 Mix of business
 Capital allocation
 ROE
 Net retention strategy
 Internal structure changes if necessary
Other Career Options for Actuaries
*Actuaries are fundamentally qualified for many functions within an
insurance enterprise BUT learning never stops
Caution:
*May only see the 1/9th of the iceberg above the water
*Underwriters are sometimes accused of having just
enough understanding of actuarial principles to be
dangerous --- we don’t want to be accused of the
same thing
•Can be difficult to break into these other areas without either a
Management Rotational Program or a mentor who helps guide you
there
Other Career Options for Actuaries (Continued)
•Recommend collectively sitting down with your boss, H/R, and the
“target” functional executive to plot a course towards achieving your
goals; may involve additional coursework and/or shifting from your
current “comfort zone”; perhaps some units would accept a
“transitioning”
•You CAN make it work
•It may involve a “reality check”. For example, while you were
passing exams, underwriting staff with the same years of experience
you possess have been accumulating significant experience, trial-byerror knowledge, and possess many business contacts that are critical
and difficult to amass quickly. Expect to Pay Your Dues!
Other Career Options for Actuaries (Continued)
* Innovation / Alternative Markets / Capital Markets
* Chief Financial Officer
* Chief Information Officer
* Chief Underwriting Officer
* Chief Ceded Reinsurance Officer
* Enterprise Risk Management Officer
* Chief Risk Officer
* Business Unit Executive
* Chief Operating Officer
* President and/or Chief Executive Officer
PICC Your Battles
Passion
Intuition
Courage
Credibility