Underwriting Risk Models: An Assessment
Presented by
Urban E. Leimkuhler, FCAS, MAAA
Manager & Senior Consultant
Milliman - Princeton
CAS Annual Meeting – New Orleans
November 10, 2003
Milliman USA - Slide 1
Underwriting Assessment
Outline
 Underwriting Assessment -The Problem
 Potential Solution
 Suggested Approach
 The Process
 Outcome
Milliman USA - Slide 2
Underwriting Assessment
Compelling Industry Need for Excellence
In Underwriting
 Low interest rate environment implies higher target
underwriting returns
 Resulting need to maximize performance at
individual risk and portfolio levels
 Industry actions affecting underwriting performance
and readiness
 Value in institutionalizing underwriting excellence
Milliman USA - Slide 3
Underwriting Assessment
The Problem:
Industry failures to effectively train commercial lines
underwriters
 Insufficient value attached to underwriting
as a differentiator in company performance
 Demise of underwriter training programs
 Prolonged soft market underwriting
and pricing practices
 No available quick fixes
Milliman USA - Slide 4
Underwriting Assessment
Potential Solution:
Institutionalize profitable risk selection and
management
 Analyze and quantify the effectiveness of
underwriting and pricing practices
 Identify and target opportunities for improvement
 Implement changes in processes
 Monitor and measure benefits through regular
check-ups
Milliman USA - Slide 5
Underwriting Assessment
Suggested Approach:
 Evaluate specific areas for improvement
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Strategies and guidelines
Information collection and management
Exposure identification / analysis underlying risk selection
Application of underwriting and pricing practices to individual risk
Monitoring tools
Benchmark and measure performance
Identify and quantify performance gaps
Report to management
Implement improvements
Benchmark performance at multiple levels
Milliman USA - Slide 6
Underwriting Assessment
The Process
 Interviews (Evaluate Process)
 File Reviews (Assess Outcomes)
 Reports and Graphs
Milliman USA - Slide 7
Underwriting Assessment
Interviews to Evaluate Process
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Strategies and Guidelines
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Application of Underwriting / Pricing Practices
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Monitoring Tools
Milliman USA - Slide 8
Underwriting Assessment
Interviews to Evaluate Process
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General Manager
Underwriting Manager
Underwriter
Actuary
Loss Control
Claims
Marketing
Milliman USA - Slide 9
Underwriting Assessment
Interviews to Evaluate Process
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Strategies and Guidelines
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Application of Underwriting / Pricing Practices
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Monitoring Tools
Milliman USA - Slide 10
Underwriting Assessment
Process Interviews-Strategies and Guidelines
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Strategies / plans are defined, communicated
and managed
Ongoing market assessment
Pricing programs and goals
Underwriting authority
Ratemaking process / rating plan structure
Milliman USA - Slide 11
Underwriting Assessment
Interviews to Evaluate Process
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Strategies and Guidelines
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Application of Underwriting / Pricing Practices
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Monitoring Tools
Milliman USA - Slide 12
Underwriting Assessment
Process Interviews-Underwriting / Pricing
Practices - The Underwriter
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Use of Loss Control information by Underwriting
Role of Premium Audit
Familiarity with producer capabilities
Management reinforcement through behavior
Feedback loops involving Claims, Actuarial
Loss Control and Underwriting
Milliman USA - Slide 13
Underwriting Assessment
Use of Loss Control Information by
Underwriting - Interview Questions
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How effectively are Loss Control resources deployed
by Underwriting?
How are Loss Control recommendations addressed
by the Underwriter?
In what other ways is Loss Control asked to assist
Underwriting in ensuring effective risk selection,
pricing and ongoing risk management? What other
information is provided?
Milliman USA - Slide 14
Underwriting Assessment
Process Interviews-Underwriting / Pricing
Practices - The Actuary
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Formal rate reviews
Manual rate development
Actuaries / underwriters execute decisions
and action plans
Actuarial role in pricing
Ratemaking data and data quality
Actuarial / operating management coordination
Milliman USA - Slide 15
Underwriting Assessment
Actuarial / Operating Management
Coordination - Interview Questions
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What ongoing information and advice is
provided by Actuary to Management?
What action plans are established - and
by whom?
How effectively are these executed?
How would you characterize relationships
between Actuarial and Management?
Milliman USA - Slide 16
Underwriting Assessment
Interviews to Evaluate Process
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Strategies and Guidelines
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Application of Underwriting / Pricing Practices
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Monitoring Tools
Milliman USA - Slide 17
Underwriting Assessment
Process Interviews - Monitoring Tools
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Price Monitoring
Producer Monitoring
Automated Profit / Loss Reports
Claims Metrics
Automated Production Reports
Underwriting Reviews / Audits
Milliman USA - Slide 18
Underwriting Assessment
Sample Interview Screen - Underwriter
Milliman USA - Slide 19
Underwriting Assessment
Sample Interview Screen - Underwriter
Milliman USA - Slide 20
Underwriting Assessment
Sample Interview Screen - Actuary
Milliman USA - Slide 21
Underwriting Assessment
The Process
 Interviews (Evaluate Process)
 File Reviews (Assess Outcomes)
 Reports and Graphs
Milliman USA - Slide 22
Underwriting Assessment
File Reviews to Assess Outcomes
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Information Collection / Management
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Application of Underwriting / Pricing Practices
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Underwriting Decision
Milliman USA - Slide 23
Underwriting Assessment
File Reviews Information Collection / Management
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Risk pre-qualification
Application / renewal questionnaire
Availability of loss experience
Loss Control reports
Access to / use of outside information
Milliman USA - Slide 24
Underwriting Assessment
File Reviews - Underwriting / Pricing Practices
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Exposure basis
Classification assignment
Evaluation of underwriting exposures
Coverage considerations
Basis for price decision
Interaction among disciplines that support Underwriting
Milliman USA - Slide 25
Underwriting Assessment
File Reviews - Underwriting Decision
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Risk selection
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Underwriting referral / 2nd opinion
Milliman USA - Slide 26
Underwriting Assessment
Sample File Review Screen - Policy-Level Data
Milliman USA - Slide 27
Underwriting Assessment
Sample File Review Screen - LOB Data
Milliman USA - Slide 28
Underwriting Assessment
Sample File Review Practices Screen
Milliman USA - Slide 29
Underwriting Assessment
Sample Premium Estimate Screen
Milliman USA - Slide 30
Underwriting Assessment
The Process
 Interviews (Evaluate Process)
 File Reviews (Assess Outcomes)
 Reports and Charts
Milliman USA - Slide 31
Underwriting Assessment
Milliman USA - Slide 32
Underwriting Assessment
Opportunity for Additional Price for XYZ Branch
$0
$100,000
$200,000
$300,000
16%
Comm Auto
15%
Comm Prop
GL
Inl Marine
Umbrella
$400,000
23%
0%
85%
17%
WC
Current Total Branch Price
Incremental Review Team Price Estimate
Milliman USA - Slide 33
Underwriting Assessment
Key Underwriting Practices for XYZ Branch
WC Policies by NCCI Hazard Group
100%
% Satisfactory (2+ Rating)
80%
60%
40%
20%
0%
Risk selection
justified by UW
Low (1)
Quality & use of LC
rpts
Moderate (2)
Appropriate
exposure bases
Classification
accuracy
High (3)
Exposure-based
pricing
Very High (4)
Milliman USA - Slide 34
Underwriting Assessment
The Outcome
 Process Effectiveness Scorecard
 File Effectiveness Scorecard
 Needed Improvements in Performance
 Recommendations
 Implementation Plan
 Platform for Ongoing Benchmarking
Milliman USA - Slide 35