Pricing Approaches
and Considerations
for Large Accounts
CAS Ratemaking Seminar
March 17, 2008
1
Panelists
Mary Ann Krautheim Client Strategy Officer,
Construction Services Group,
Aon Risk Services, Inc.
 Janet Lindstrom Vice President,
Large Account Actuarial,
Arch Insurance Company

2
CAS Session Synopsis


The past decade has resulted in an increasing relevance
of actuarial approaches in pricing large accounts.
Considerations differ from traditional manual rating due
to the need to consider individual risk characteristics,
work closely with insurer and broker account executives,
and tailor insurance programs to the risk appetite of the
client.
This session will discuss these aspects including
actuarial approaches to large account pricing, the
account negotiation process, and controls that can be
used to understand the impact of negotiated insurance
programs on company results.
3
Large Account Considerations for:
Building Pricing Model
 Testing Pricing Model
 Preparing Submission to Carrier
 Individual Account Pricing
 Account Negotiation Factors
 Price & Program Monitoring

4
Building the Pricing Model

Integrated Model or Separate by Component?
Integrated Model
Separate Models
Large File – confirm that
platform is available to handle
this
Smaller Files
Complex
Less complex
Generates consistency in entire
process; Less data entry
Can have error transferring
outcomes between steps or
components (unless automated
transfer between each step)
5
Building the Pricing Model

Who is the User?
 Actuary
or Non-Actuary
 If Non-Actuary, how much should be displayed vs.
behind the scenes (black box)
 At what level and steps will judgments be selected
 How will variations from Model Indicated be captured
& measured
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Building the Pricing Model

Who is the Customer?
 Large Account
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


through:
Growth of business over time
Merger/Acquisition or Roll-up
Migration to greater levels of self insurance
Captive creation
 Single
entity or group of several entities
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Building the Pricing Model

Who is the Customer? (cont.)
 Sophistication


Often employ own risk manager(s)
May employ own actuary
 Separate
Models for each Segment, or just vary
parameters within one Model?



Construction
Transportation
Energy, etc.
8
Building the Pricing Model

Who is the Customer? (cont.)
 What
are they looking for on the Risk Transfer
Continuum?
Least Risk
Guaranteed Cost
Small Ded
Most Risk
Retro or Large Ded
Self Insured Retention
Captive
 Layer Cost
 Predetermined through Premium or
 Variable based on actual loss
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Building the Pricing Model

What Lines will Carrier Provide for Large
Accounts?









WC (Medical vs. Indemnity)
GL (Prem/Ops vs. Products/CO)
Auto (Liab vs. Phys Dam)
Property (Perils; Cat; Inland Marine; Builders Risk, etc)
Medical Malpractice
Professional Liability
Umbrella/Excess Liability
Etc.
How will coverage additions/exclusions be
handled?
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Building the Pricing Model

What Program Options will Carrier Provide?
 Guaranteed
Cost
 Small Deductible – determine the split between Small
and Large deductibles, considering:



Bureau deductible definitions and rating plans
Collateral charged
Claims Handling and Reimbursement processes
 Large
Deductible
 Retro
 Self
Insured Retention (SIR)
11
Building the Pricing Model

What Additional Options Will be Available?
– single retention per occurrence across
multiple lines
 Captives
 Multi-leveled retention – such as:
 Clash



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Corridor Deductibles
Swing Plans, etc.
Priced inside main model or in separate tools?
Simulation - Will it be used, and where?
12
Building the Pricing Model

Major Pricing Components:
 Exposure
Rating
 Experience Rating
 Loss Layering
 Credibility to Combine Experience & Exposure Rates
 Expense & Profit
 Other Program Components
13
Building the Pricing Model

Exposure Rating (Manual Rating)
 Sources

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
Rating Bureau Rates or Loss Costs
Proprietary Segment Specific Rating
Underlying Carrier Pricing
 Balancing
Scope of Exposure Rating with expected
Credibility of Accounts
 Determine how variability within a class will be
handled
14
Building the Pricing Model

Experience Rating (Loss Rating)
 Loss Detail Entered
 All Individual Claim Detail or Total Loss & Large Losses
All Individual Claim Detail
Total & Large Loss
May not be available
Generally Always Available, but
check large loss threshold
More Data Entry unless in
Copy/Paste technology
Less Data Entry
Much more useful for curve
fitting and trend analysis
Much less information for curve
fitting and trend analysis
 Non-annual
policy periods – Impact on Trend & LDFs
15
Building the Pricing Model

Experience Rating, cont.
 Loss Cap &
 Similar to:




Only less than Retention, or
Set regardless of Retention
Relation to Credibility –



Experience rating plans – with emphasis on frequency, or
Loss rating plans - to incorporate larger working layer
Relation to Retention –


Working Layer - Determine Philosophy
Set to generate stability within layer or
Allow Credibility to take stability into account for each layer
What Large Loss Threshold will be required for data entry?

Should be at least all claims > de-trended loss cap and/or detrended lowest layer used in layering
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Building the Pricing Model

Experience Rating, cont.

Parameters –

Types

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Sources, where applicable
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Trend – Loss & Exposure
Benefit Level Adjustment Factors (BLAFs)
Development - Loss & Claim
Interest Rates, etc
Bureau filings or exhibits
Industry studies
Competitor Filings
Proprietary data
Credibility-Weighted Account Specific
Decisions


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Dimension - Countrywide, regional, state, etc
Incorporating differences in development patterns – industry vs.
company vs. TPA
Timing of updates
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Building the Pricing Model

Credibility
 Determine basis

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# Claims
Exposure bases
Loss volume
Variability of data

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
Depends upon how much loss data provided:
 Variation between years for all situations
 Variation within each year only if all individual claim detail (ground
up) provided
Combination of above bases
Other
 Determine Application

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Only to Limited Loss, or
By Loss Layer
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Building the Pricing Model

Loss Layering
 At



what levels will layering be done?
Loss Cap
Retention Options
Excess layers – and determine:


Who enters the layers
How many layers will be displayed
 How will loss be layered?
 ILFs or ELFs from Rating Bureaus
 Proprietary severity distributions by line, segment, hazard
group, etc.
 Credibility-Weighted Account Specific loss distributions
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Building the Pricing Model

Loss Layering, cont.
 At

each layer, what will be displayed?
Exposure Rated


Experience Rated






Using the various exposure rate methods
Actual loss
Trended and/or Trended & Developed
Burning Cost (Trended, Developed, and Exposure-Adjusted)
Credibility-Weighted
Reinsurance Impact
Other
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Building the Pricing Model

Expense & Profit
 Commission
 Claim



In-house or TPA
Who is collecting and paying
Does income on balance accrue to customer or carrier
 Fixed

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Handling Expense
& Other Variable Expense – as affected by:
Lines of business
# Policies
Program Structure, etc.
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Building the Pricing Model

Expense & Profit, cont.
 Taxes & Assessments
 Premium Based




Loss Based Assessments (LBA)

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
State Premium Taxes
Assessments
Surcharges
Set (fixed) on expected level, or
Passed through on actual loss or premium
 Fixed Rate
 Variable Rate
Premium and Loss Basis Definitions


Differ between each assessment
Surcharges before/after deductible credit
22
Building the Pricing Model

Expense & Profit, cont.
 Other Program Components
 Payment Options (Pay Plans)

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In Total or by Pricing Component
Preset pay plans only, or are custom plans allowed
Cash flow implications
Collateral



What forms will be acceptable to carrier
What timing will be involved
Where will income from balances accrue – carrier or customer
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Building the Pricing Model

Expense & Profit, cont.
 Profit




and/or Permissible Loss Ratio –
For book or by account (based on account’s own qualities
and payment streams)
Within or outside of pricing model
What will capital allocation be for large accounts
What methodology will be used to determine needed profit
and risk load
24
Testing the Pricing Model

Once Model has been built – to test it:
 Sample

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Outcome - Between Models
Representative sample of accounts or entire book
Impact of changes (between previous model or model
editions)
 Sensitivity


Testing - Within Model
Changing Parameters
Changing Selections
 Other
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Individual Large Accounts

Once model is built and tested, Lifecycle
for individual large account is:
 Financials
 Understanding
Carriers’ Appetites
 Understanding Customer
 Submissions to Carrier(s)
 Individual Account Pricing
 Negotiation
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Understanding the Customer

Enterprise Risk Management for Customer

Total Cost of Risk


Balance Sheet
Off-Balance Sheet

Risk Aversion vs. Risk Affinity
 Historical Data vs. Future Plans vs. Market
 Choice of Where to Invest





Premium
Risk Control
Claims Management
Control vs. Lack of Control
Result - Program Structure(s) Requested in Submission
to Carrier
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Account Pricing Considerations

Once submission received and entered
into model – individual account pricing
considerations are:
 Exposure

Rating
Impacts to base rate and/or severity distribution if:
Individual account loss exposure in upper or lower end of
a class
 Not all hazards have been covered in exposure rating
 Significant change in risk position over time

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Account Pricing Considerations

Experience Rating
 Data
Issues
Evaluation dates more than a few months from
effective date
 Lack of first dollar loss and claim counts
 Incomplete ALAE information
 Lack of claim counts for claims closed without
payment

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Account Pricing Considerations

Experience Rating, cont.
 Fundamental
Change in Risk
Coverage – history or upcoming policy period
 Risk Management Protocols
 Mergers & Acquisitions; Roll-ups
 Sale of an Entity
 Mix of Business

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Account Pricing Considerations

Experience Rating, cont.
 Data
Validation
Understand data received
 Ensure it ties between data sources

 Diagnostics
Patterns in large losses
 Paid ALAE/Paid Loss (is account or claim handler
more likely to settle or hold)
 Paid/Incurred Loss & ALAE (to help determine if
under-reserved)

31
Account Pricing Considerations

Experience Rating, cont.
 Loss

Rates
Steadily increasing or decreasing?
Too strong/light trend factors, or
 Possible underlying changes in:
 Mix of business
 Claims handling (have appropriate LDFs been
used?)

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Account Pricing Considerations

Experience Rating, cont.
 Loss

Rates, cont.
Cutoff point – like two different accounts?
Significant change in account management or claim
handling practices, or
 Incorrect BLAF

Frequency or Severity increasing or decreasing
 As Loss Cap is raised, how volatile do loss rates
become

33
Account Pricing Considerations

Experience Rating, cont.
 Loss
Layering
Credibility by Layer
 Burning Cost vs. True Exposure to Loss

34
Account Pricing Considerations

Expense & Profit
 Accurate

Fixed Expense Load
When models at different “levels” than policy
issuance or loss sensitive adjustment process consider actual fixed expense expected
 Claim
Handling
In-house Cost
 TPA Fees
 Loss Conversion Factor (LCF)

35
Account Negotiation Factors

Once quote sent by carrier, specific negotiation
factors are:
 Total Cost of Risk
 Risk Control
 Variable Cost
 Loss Pick
 Max
 Taxes
 Types of Risk
 Terrorism
 Climatic
 Political
 Economic
36
Account Negotiation Factors

Once quote sent by carrier, specific negotiation
factors are: (cont.)
 Qualitative



Ancillary Services
Stability of Carrier
Cost of Claim Handling
 Loss



Factors
Scenarios
Best
Mid
Worst
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Documenting Program

Once quote is bound, program should be
fully documented
 Why

–
Changes will occur
Merger/Acquisition in Customer or Carrier
 Underwriters


If not documented well, risk to carrier and
customer
 Closeout
vs. holding liability on balance sheet
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Price & Program Monitoring


Benefits to Carrier, Broker & Customer
Possible Types



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Renewal Rate Change
Benchmark Monitoring
Aggregate Retention Erosion
Other
Possible Summary Levels






Line of Business
Program Structure Type
Underwriter
Pricing Actuary
Region
Account
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Price & Program Monitoring

Standard adjustments needed for change in:







Exposure level & type
Limit(s) – policy and sublimits
Retention(s) – occurrence & aggregate
Mix of business – state, class, etc
Policy term length
Coverage additions or exclusions
Outcome – Ability to track change in large account
pricing and program structures from specific date and or
rate level for new and renewal business
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