The Challenges of Medium to Large Sized
Commercial Insurance Risks
July 4, 2007
Presentation for the Ontario Conference of Casualty Actuaries
Overview
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Medium to Large Sized Commercial Insurance Risks - Definition
Differences from Personal and Small Commercial Risks with respect to:
 Risk Characteristics
 Insurance Market Environment
 Regulatory Environment
Challenges of Medium to Large Sized Commercial Insurance Risks
Conclusion
Questions???
Medium to Large Sized Commercial
Insurance Risks - Definition
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Medium to Large Commercial Risks includes (for the purpose of this
presentation):
 Commercial Risks with an all-lines insurance premium in excess of
$25,000
Examples:
Medium to Large Commercial Risks
Province of Alberta
City of Portcolborne
BC Hydro
Apotex
CP Rail
Bombardier
BCE
NexInnovations
Clearwater Seafood
Aecon Group
Millennium Films
Best Buy
Clublink
Type of Risk
Government
City
Public Utility
Pharmaceutical
Transportation
Transportation
Communications
Electronics Manufacturing
Ocean Marine
Construction
Film/Entertainment
Retail
Recreation
Differences from Personal and Small
Commercial Risks - Risk Characteristics
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Large Number/Accumulation of Risks
 Multiple number of properties
 Multiple business transactions
 Multiple number of employees
 Potential multiple owned companies
Varying Loss Exposures within a Medium-Large Commercial Risk
 Property Example
- Province Alberta varying properties with different loss
exposures such as Gov Offices, Hospitals, Museums,
Laboratories, Prisons, Warehouses, Community Housing, Etc…
 Liability Example
- Aecon Group is involved in various types of construction
projects including highways, roads, bridges, high-rises, etc….
Differences from Personal and Small
Commercial Risks - Risk Characteristics
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Loss Exposures may extend outside of Canada
 Properties owned outside Canada
 Products sold outside Canada
Loss Exposures are potentially unstable over-time
 Exposure may change as companies:
- Start new business ventures
- Sale part of their business or acquire another
- Change their products and services
- Change management and staff
- Etc…
Loss Exposures may be significantly through Risk Management (Loss
Control) practices
 Larger risks tend to have a Risk Manager on staff
Differences from Personal and Small
Commercial Risks - Risk Characteristics
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Insurance Structure may be complex and involve significant Self-Insured
Retention
 Self-Insured Retention may take form of large deductible, annual
aggregate deductible, captive arrangements, ….
 Example: Layered property insurance program with annual deductible:
- Primary layer: 25M per claim xs of 2M per year
- 1st Layer: 25M xs 25M
- 2nd Layer: 50M xs 50M ……
 Above characteristics make Medium-Large Commercial Risks somewhat
…. unique
 Insurance buyers are more sophisticated
 In addition to price, often consider insurance company’s:
- Quality of services (underwriting, claim and risk management)
- Quality of insurance product (matching to coverage needs)
- Rating from Credit Rating Agencies
- Etc…
Differences from Personal and Small
Commercial Risks - Risk Characteristics
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Historical Loss Experience of the insured may be somewhat
credible/reliable to predict future losses
Final/Ultimate value of losses tend to be unknown for a longer period of
time
 Liability claims, especially for a Medium-Large Commercial Risks,
have relatively long reporting and settlement lags
 Liability claims tend to be a significant portion of a typical MediumLarge Commercial Risk clam inventory
 Typical Payment Pattern: End of Yr: Pattern
1
2
3
4
5
6
7
15
14%
41%
52%
64%
78%
85%
90%
100%
Differences from Personal and Small
Commercial Risks – Environment
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Brokerage is almost the only distribution channel and has a large role
 Medium-Large Commercial Risks require broker’s expertise on:
- What coverages and services to purchase to protect their
particular loss exposures
- Which insurers can provide these coverages and services
- Comparing varying insurance offers
 Some larger insurance protections require multiple insurers
Insurers in the Medium-Large Commercial Insurance Market are
generally specialized in certain sectors only and don’t tend to write
personal and small commercial business
- Some reasons: Each market require different:
 Skills/resources
 Risk appetite
 Strategy
Differences from Personal and Small
Commercial Risks – Environment
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Very limited rate and form regulation
 Automobile risks tend to be fleets (5 or more vehicles…) which are
not regulated for rates
Challenges of Medium to Large Sized
Commercial Insurance Risks
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Focus here is on Challenges that are more specific to Medium-Large
Commercial Risks Insurers
 Many Challenges are common for Personal, Small, Medium or Large
Commercial risks insurers
 Consistency of profitability during Insurance Market cycles is arguably
the biggest challenge….
 Broker has significant influence to the client’s buying decisions
 Price is only one consideration in the decision making process, not
the only one
 Broker may recommend an insurer’s offer over an other based on:
- Insurer’s superior products and services
- Broker’s relationship with insurer and its representatives
 Medium-Large Commercial Risks Insurers will tend to invest
significant amount of time and money toward building broker
relationships
Challenges of Medium to Large Sized
Commercial Insurance Risks
 Product and Services Development
 Is a typically significant part of a Medium-Large Commercial Risks
Insurer – due to extensive loss exposures and risks uniqueness
 Challenges of Product and Services Development include:
- Frequency of development needs as changes occur in the loss
exposures, competitors products, …
- Significant expertise required from product specialists,
underwriting, legal, claims, risk control…..
- Acquiring and maintaining that expertise
 Many Insurers leverage from parent company’s expertise
 Variety of Products and Services available in the market
 Challenges brokers and insurers to understand the differences
between insurers products.
 Challenges insurers’ ability to highlight the advantages of its products
 Some insurers provide product comparisons and broker training
Challenges of Medium to Large Sized
Commercial Insurance Risks
 Exposure Rates (from rate manuals) can be estimated but are not accurate
for any individual risk
 Rate manuals do not reflect all the risk characteristics affecting the loss
exposure and several Rate manuals’ rating variables are not based on
statistical modeling. Reasons include:
- Small volume of business relative to the large number of risk
characteristics
- Some risk characteristics are not captured in the company data
- Industry data only captures some characteristics and is reporting is
voluntary
 Medium-Large Commercial Risks insurers have knowledgeable and
experienced underwriters to:
- Analyze each risk individually to understand its particular loss
exposures (time-consuming process)
- Adjust, sometimes very significantly, the risk’s exposure rate
accordingly
Challenges of Medium to Large Sized
Commercial Insurance Risks
 Loss Experience Rating can be done but is challenging
 Challenges include:
- Reconciling various historical claims listings between potentially:
 Past insurers listing
 Broker’s listing
 Claim adjuster’s listing
 Client’s listing
 Adjustment of historical experience for change in the risks’ exposures
and insurance coverage
- Typically use an exposure base (insured values, revenues, …) to
approximate the change
- May require adjustment/elimination of some past losses (examples:
change in coverage for sexual abuse claims, change in
deductibles, etc…)
Challenges of Medium to Large Sized
Commercial Insurance Risks
 Adjustment of historical claims experience for late reported claims and
adequacy of open claims reserves (IBNR)
- Typically done using factor from internal statistical analysis but
additional challenge of varying adequacy of open claims reserves
by company
- Judgment and reasonability/benchmarking check is key
 Adjustment for appropriate cat and large loss loadings
 Adjustment for exposures without past losses
 Projecting losses under different and sometimes complex insurance
structures (annual aggregate deductibles, etc…)
- Aggregate Loss distribution modeling is useful but the data used in
the model tend to be limited….
 Overall credibility of the loss experience rating premium indication
…after all these adjustments. I.E. What is a reasonable premium
range around that indication?
- Again, lots of subjectivity requiring excellent judgment!
Challenges of Medium to Large Sized
Commercial Insurance Risks
 True profitability of current portfolio is not accurately known due to the
uncertainty surrounding the large amount of unpaid claims
 Challenges the management team when deciding on the underwriting
actions required on renewal and new business going forward
 Increases the importance of reserve reviews and the proper allocation
of IBNR by insurance segments within the company
Challenges of Medium to Large Sized
Commercial Insurance Risks
 Claims are more complex to handle.
 Often coverage is less certain and requires careful investigation and
evaluation.
- How do you confirm coverage on a vehicle when the fleet is
made up of several hundred vehicles? Do you have a schedule
and is it up to date?
- How do you evaluate the adequacy of policy limits when stock is
moving between 15 locations? How do you assess the value of
stock at the various stages of production?
- How do you evaluate your exposure for a building loss when
there are 200 locations insured on a blanket basis.
- How do you estimate your exposure to a class proceeding?
- At times the policies are written on “manuscript wordings” which
will have specific conditions unique to the insured. How do you
price the impact of these changes?
Challenges of Medium to Large Sized
Commercial Insurance Risks
 The policies may involve various forms of retention by the insured.
- For example is there a Third Party Deductible or Self Insured
Retention (SIR)? We are required to post reserves for third party
deductibles. We don’t reserve for SIR amounts. This impacts
the amount of capital that we have tied up in reserves.
- Does the retention amount include adjusting and legal
expenses? If it does, when are these amounts paid, before or
after settlement?
- Is there an Aggregate limit to the retention? Who will manage
the claims with-in the retention and monitor the Aggregate
development? Will you need to perform audits to make sure the
handling matches your own reserve philosophy?
- Will the payment process involve a trust account. Who manages
the account and are letters of credit required?
Challenges of Medium to Large Sized
Commercial Insurance Risks
The insured often has greater choice over the level of claims service
they require and how they want that service provided.
- Who will do the claims investigation? Does the insured want to
use an independent adjuster on all of their losses? Who pays for
the additional costs associated with this.
- Unlike Personal Lines, Commercial clients are often expected to
have a certain number of claims. Who will manage the claims
data so everyone is aware of the program development.
- Does the insured have a list of preferred vendors they want to
use for repairs? How will this impact on your claims costs.
- Do they have a good internal risk management process? How
can we help them understand the benefits of this? If they don’t
have a process how will this impact the losses?
Conclusion
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Medium-Large Commercial Insurance Market is very challenging for all the
competing insurers
In a market where information is available to help determine what the
appropriate rate should be,it is often the less informed market that drives
the price.
A commercial insurers real strength is in having the knowledge and ability to
select the right risk with-in this pricing reality.
Insurers in that market are risk takers as claims can be severe and many
decisions are made without complete statistical support
Outperforming the competition requires superior expertise and resources,
and collaboration, especially between:
 Underwriting
 Claims
 Actuarial
 Management
Questions??