Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services

Few Brief Notes Before Starting
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services

Why am I Up Here?
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services

Disclaimer
– I work for the Florida Office of Insurance Regulation.
– I work in the Financial Oversight area, not Rate and Form
review
– I’m speaking as a private individual
– Nothing I say should be interpreted as policy of the
Florida Office of Insurance Regulation.
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• What I Will Cover
1. Short Description of Cycle and It’s Phases
a. Including the role of actuaries
2. Impact on Consumers/Risk Managers
3. Impact on Insurance Business
4. Economic Moats as a Defensive Measure
5.
Viability of Companies with Strong Economic
Moats
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Current Market Phase
– Softening
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services

How the Cycle Works
–
Right now, are in a softening phase
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services

What can be concluded about current
phase?
–
–
–
–
Area where extremes occur
Effective decreases larger than price changes
Some lines may still be profitable
Not all lines are affected equally
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
 Per internal study 1995-2004 reserve
adequacy at 12/31/04
– Most lines adequately reserved
– Workers comp is major exception
– 2004 Homeowners cat impact on reserves
untestable.
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
 Conclusion: Market is softening, but can go
much softer
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services

To the Trough of the Soft Market
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
– To the Trough of the Soft Market
– a. Pricing will continue to decrease
– b. If reserving stays adequate, operating losses on
underwriting will be reported.
» They will certainly occur.
– c. If events follow prior patterns, reserving will not stay
adequate
differences between cos.
actuaries role in extending the cycle
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
–
First, industry will only show profit = bond return if
surplus was invested in bonds

Assumes break-even on underwriting

Likely true profitability is negative
– Eventually, market segments will report underwriting
losses
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• End of the Soft Market
Eventually, some companies will go under and some
companies will abandon losing ventures.
For undetermined reasons, these tend to all occur at about
the same time
Revision in underwriter budgets/available premium ratio.
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
The Hard Market
• Develops quickly
– underwriters suddenly have more pricing
power.
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
The Hard Market – Secondary Phase
• Surplus squeezed by rising rates
• Profits underreported at some cos.
• Another role of the actuary
• Some risks are completely ‘orphaned’
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
End of the Hard Market
• Textbook economic response
to greater
profitability occurs
• Relatively slow developing of soft market
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Consumer/Risk Manager View:
• ‘Why do you (insurance industry) make my
life/job unduly difficult?’
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Risk Manager View:
• Can exploit cycle by ‘buying low and
selling high’
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Impact on ‘Business’ Part of Insurance
Business
– Strong management and superior execution,
etc. may not deliver profits.
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Impact on ‘Business’ Part of Insurance
Business
– Incredible pressure to manage reserves in
‘average performer’ as well as ‘lackluster’
companies
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Impact on ‘Business’ Part of Insurance
Business
– Weakened results culture
– Note the long-term slide of what were once
industry leaders
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Strategies for Dealing with the Cycle
– Expand in hard markets and contract in soft
markets
– Constant Market Share
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Economic Moats As a Defensive Measure
in Soft Markets
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
• Economic Moats As a Defensive Measure
in Soft Markets
– Definition of Economic Moat – Some aspect of
the company’s operations or product that
partially or totally insulates the company from
competition and is hard for competitors to
replicate.
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
Sample Aspects of Economic Moats
1. Service
2. Risk Selection
3. Coverages Offered
4. Loss Control
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
Niche Approach to Economic Moats
1. Service Tailored to Niche
2. Understanding Loss Cost Drivers
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
Unlike Other Industries, a Moat Does Not
Guarantee Profits
Example from Personal Experience
Managing Through the Underwriting Cycle
Spring 2005 CAS Convention
By Joseph Boor, FCAS, Owner-Actuarial Education Services
Summary