RCM-2 What Are We Debating About Now?
Russ Bingham
Vice President and Director of Corporate Research
Hartford Financial Services
Seminar on Ratemaking
Philadelphia, PA
March 11-12, 2004
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Discussion Points
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Models vs Metrics – “Builders” & “Parameterizers”
What is the Risk / Return Tradeoff that is considered in YOUR
ratemaking process?
How / what risks are reflected?
How are external Capital Costs considered in your ratemaking
process – have they been integrated along with internal costs into a
single model?
Does the ratemaking model and process connect to the broader
corporate shareholder perspective in some way? e.g. Is Economic
Value Added an output of the ratemaking model?
Can you speak for 15 minutes to your senior management about
how your ratemaking model deals with the relationship between
Price, Risk, Leverage and Return?
How important is it that the Actuarial community reach agreement
on a unified total return / total risk framework that might prevent
regulatory arbitrariness?
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Financial Integrity
Ideal Ratemaking Financial Documentation Support
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Fully integrated balance sheet, income and cash flow
statements
Policy / accident period focus with calendar period provided
if needed
Nominal and economic accounting valuations
Clearly and consistently stated parameter estimates
 Premium, loss and expense amount
 Timing of premium collection, loss and expense payment
 Investment yield rates
 Underwriting and investment tax rates
 Specification of risks included
 Amount of capital and its cost
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Ten Commandments of Insurance Financial Modeling
1. Thou shalt build only models that have an integrated set of balance
sheet, income and cash flow statements
2. Thou shalt remain rooted in a policy period orientation and develop
calendar period results from this base
3. Thou shalt reflect both conventional and economic accounting
perspectives - guided by economics, constrained by conventions
4. Thou shalt recognize the separate contributions from each of
underwriting, investment and finance activities
5. Thou shalt be guided by the risk / return relationship in all aspects
6. Thou shalt include all sources of company, policyholder and shareholder
revenue and expense embodied in the insurance process
7. Thou shalt reflect all risk transfer activities
8. Thou shalt not separate risk from return
9. Thou shalt not omit any perspective or financial metric that adds
understanding
10. Thou shalt allow differences in result only from clearly identified
differences in assumption, and not from model omission
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