Actuarial Value
John Burville
May 19th, 2004
I am an Actuary
A “herd” of Actuaries
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already ...
Actuarial Value
The drive for profitability
The Story of ACE
Acquisition Trail
1995 - 1999

Lloyds syndicates

Catastrophe Reinsurer (Tempest)

Westchester (USA)

CIGNA’s worldwide P&C

Capital Re
ACE Transformation
Year
Location
Lines Of
Business
1994
Bermuda
XL, D&O
1999
Worldwide Most
Commercial
Lines
Number
of Staff
Total
Reserves
Total
Assets
40
$1.2bn
$3bn
8,000
$9bn
$30bn
Nouveau Business
Plan
Starting point:
CIGNA - Combined >110%
Business Plan:
1. Cease all businesses with Combined >100%.
2. Reinsure Run-off liabilities
Ending point:
ACE USA - Combined <100%
ACE Transformation
Year
Number of actuaries
1994 1
1999 100
Photos
Actuarial Value

Reserving

ROE

Planning

Monitoring

ROE
With specific
deliverables to key
management
Reserving

Establish sound reserving practices.

Have reviews completed timely.

Use a consistent reporting to Head Office.

Succinct reports for executive management.
ROE
Revenue divided by Equity
ROE

A measure to ensure effective use of capital.

Alternative views on ROE:
–
–
–
–
Calendar year ROE
Pricing ROE
ROE measure for multi-year tailored contracts
et al
ROE
“Field of Dreams”
ROE - E an Enigma

Capital needed in ACE
–
–
–
–

Market comparisons
DFA analysis
Statutory RBC models
Rating Agencies
Rating agencies
–
Each rating agency has different ways of assessing needed
capital:
O
RBC type model.
O
Various ratios and tests.
O
Comparison with other companies in common rating
category.
ROE - E use S&P Model

Lower bound of needed capital.

Can get a copy from S&P.

Is a well defined model.

Can be built by the company.

Additive.

Is simple to use and easy to manage.
ROE - method

Pricing ROE.

Run a cash flow model.

Use S&P capital.

ROE is IRR of Surplus flows.
ROE Pricing Model
IRR on Equity Flows
Premium
Loss, Expense
Inv Income
Income Tax
Single Policy Venture Ltd.
Income
Assets
Liabilities
UW
Invest
Taxes
Invested
Receivable
Recoverable
UPR
Loss RSV
Expense RSV
Funds Held
Equity
Equity Flows
Pool of Equity
ROE - GL example
Year Premium Expense
0
100,000 (27,490)
1
2
3
…
Paid
EOY
Losses reserve
0 70,000
(6,617) 63,383
(7,125) 56,258
(10,256) 46,003
Inv
Surplus
Income
Flows
2,048 (64,126)
7,449
58022
4,161
4,268
3,456
4,497
1. Surplus amounts use S&P Capital Adequacy factors for premiums,
reserves and assets. GL factors used here are: Premiums 1.5 x 0.33,
Reserves 1.5 x 0.11, Assets 4.5%.
2. ROE is IRR of surplus flows.
Pricing
Model
ROE
Where are we now?
Combined Ratio Needed to Achieve ROE
Division
Bus. Unit 1
Bus. Unit 2
Bus. Unit 3
Bus. Unit 4
Bus. Unit 5
Bus. Unit 6
Bus. Unit 7
Bus. Unit 8
Bus. Unit 9
Grand Total
10% 12.5%
104% 102%
102% 99%
101% 97%
97% 94%
106% 104%
96% 92%
94% 91%
95% 93%
98% 96%
99% 96%
ROE
15% 17.5% 20%
100% 99% 97%
95% 92% 90%
94% 90% 87%
92% 90% 88%
101% 98% 95%
89% 86% 83%
89% 86% 84%
91% 89% 88%
94% 92% 91%
93% 91% 88%
ROE - Actuarial Value
Using ROE pricing models should result in
achieving the ROE in the future.


Division managers will be given ROE targets.
Division managers will establish ROEs for
products and business units within the division.

–
–
–

Manager will set guidance for minimum acceptable ROE by
product line.
Some products deserve to achieve higher ROEs.
Some will always achieve a lot less.
Use ROEs as part of the planning process.
Planning Cycle

CEO sets pricing ROE targets.
Planning process establishes strategies to
achieve loss ratios, ROEs, and volumes.

Quarterly monitoring of planned strategies, and
revision of loss ratios.


Use ROEs as guide in planning process.
Planning Cycle
Determine Pricing ROEs.
Present ROEs to CEOs, and
Underwriters.
Develop alternative scenarios to achieve
acceptable ROE for next year.
Manager/Underwriter agree ROE,
Volume, plan loss ratios, and the
strategies to achieve plan loss ratios.
Underwriters work with actuaries to
monitor and manage strategies. Eg
Pricing, risk selection, loss experience.
Results during the year.
Submit Plan with
strategies
Verify achievements of
Plan strategies
Bridging Analysis
Business
Segment 1
Hist. Indication
Combined
Ratio
ROE
105.8%
8.0%
Action Steps:
Rate Change
-6.0%
Treaty Renew .
2.5%
Elim. Bad Accts.
-2.0%
Loss Control
-2.0%
Final Plan Selection 98.3%
16.3%
Bridging Analysis
Current Indicated Combined Ratio and ROE
Selected Run Rate :
Combined Ratio @ Slctd. Run Rate :
74.0%
Loss Ratio Action Steps
105.8%
ROE @ Selected Run Rate :
Impact
8.0%
Monitoring Tool/Frequency
1.
Rate Change of 10% effective 1/1/02
6.0%
Price Monitoring Reports/Monthly
2.
Increase of +5% in Treaty Renewal Terms, 7/1/02
-2.5%
Treaty Renewal Terms, 7/1/02
3.
Non-Renew Accouts ABC, DEF, & GHI
2.0%
Per Underwriter/Quarterly Updates
4.
New Loss Control Initiative
2.0%
Claim Freq Reports/Quarterly
7.5%
Selected Plan Loss Ratio :
66.5%
Combined Ratio @ Selected Plan LR :
98.3%
ROE @ Selected Plan LR :
16.3%
ROE planning process
Underwriter and actuary must work together to develop the
plan ROEs.

–
–
–
Actuary will develop projected loss ratios.
Underwriter will agree achievable price/contract terms/reinsurance
costs/new business strategies.
Actuary will reflect underwriters strategies into the ROE bridging analysis
to arrive at pricing ROE.
The process is dependent upon achieving agreed
strategies.


The strategies can be verified.
–
–
–
–

Price monitoring
Underwriter culling activity.
Contract changes
Reinsurance changes
The planning process targets the CEOs primary ROE goal.
–
–
Deliverables are created
Actuary and underwriter are both responsible for the component
verifiable parts.