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 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 Strategies and Guidelines Application of Underwriting / Pricing Practices Monitoring Tools Milliman USA - Slide 8 Underwriting Assessment Interviews to Evaluate Process General Manager Underwriting Manager Underwriter Actuary Loss Control Claims Marketing Milliman USA - Slide 9 Underwriting Assessment Interviews to Evaluate Process Strategies and Guidelines Application of Underwriting / Pricing Practices Monitoring Tools Milliman USA - Slide 10 Underwriting Assessment Process Interviews-Strategies and Guidelines 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 Strategies and Guidelines Application of Underwriting / Pricing Practices Monitoring Tools Milliman USA - Slide 12 Underwriting Assessment Process Interviews-Underwriting / Pricing Practices - The Underwriter 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 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 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 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 Strategies and Guidelines Application of Underwriting / Pricing Practices Monitoring Tools Milliman USA - Slide 17 Underwriting Assessment Process Interviews - Monitoring Tools 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 Information Collection / Management Application of Underwriting / Pricing Practices Underwriting Decision Milliman USA - Slide 23 Underwriting Assessment File Reviews Information Collection / Management 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 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 Risk selection 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