Rate Adequacy Index for Commercial Lines Commercial Lines Pricing Seminar August Copyright 2012 Finity Consulting

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Dwight Gibson
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Rate Adequacy Index for Commercial Lines Commercial Lines

2 Estimated Underwriting Profit Is actual profit sending the right signals? 3 25% 15% 1 5% -5% -1-15% - Estimated Underwriting Profit- ISR U/w profit Source: Approximate. Estimated by Finity, using ISA data Slide 2

3 U/w profit Actual profit can be materially different to underlying performance Estimated u/w profit vs Underlying u/w profit- ISR 3 25% 15% 1 5% -5% -1-15% U/w profit Underlying u/w profit Source: Approximate. Estimated by Finity, using ISA data Slide 3

4 What is a Rate Adequacy Index? Premium Achieved Required Technical Premium Rate Adequacy Assess: Per risk Per segment Per portfolio Slide 4

5 Rate Adequacy Index ISR Rate Adequacy Index 14 ISR Rate Adequacy Index Rate Adequacy Index Target Source: Approximate. Estimated by Finity, using ISA data Slide 5

6 Some calculation challenges Portfolio calculation vs risk based calculation Need technical rates for risk based calculation Changes to risk (eg. Excess levels) Cross subsidies Dealing with changes in estimate of technical costs Changes in reinsurance costs Slide 6

7 Who uses RAI? Great Britain 29 Australia United States 7 46 Required for all Lloyds Syndicates Most non-lloyds insurers also have RAI Limitations as most don t see a real technical price Limited visibility. Used by actuaries and sometimes underwriters but rarely flowed up to management Some insurers only Some reinsurers Varying levels of detail Varying visibility within organisation Assessment of rate changes (rather than adequacy) common Evidence of technical RAI approaches in the industry * Medal allocation based on the MAP Methodology by Brian Dawes Slide 7

8 What is RAI used for? Strategic decision making Portfolio management decision making Rate decisions by underwriters Useful to actuary for liability valuation models, including premium liability and price adequacy assessment in FCR By reinsurers to assess required rate for portfolio Rewarding staff Slide 8

9 Cents per $100 SI Cents per $100 SI ISR Technical Premium Components $0.06 Non-Natural Perils Cost $0.06 Weather Cost $0.05 $0.05 $0.04 $0.04 $0.03 $0.03 $0.02 $0.02 $0.01 $0.01 $- $- Source: ISA data Source: ISA data Selected average non-natural peril cost Selected average weather cost (exc. cats) 4 cents per $100 SI 0.7 cents per $100 SI Slide 9

10 cents per $100 SI cents per $100 SI ISR Technical Premium Components $0.025 Net CAT Cost $0.025 CAT RI Cost $0.020 $0.020 Actual Selected $0.015 $0.015 $0.010 $0.010 $0.005 $0.005 $- $- Source: ISA data, Finity estimates Source: JP Morgan Survey Selected average net CAT cost Selected average CAT RI cost 0.6 cents per $100 SI around 0.9 cents per $100 SI Slide 10

11 ISR Technical Price Components Net Cost of Other Reinsurances Nil Other Expenses 1.2c per $100 SI (equivalent to 15% of premium) Commission 1 of Premium Target Underwriting Profit 5% of Premium Slide 11

12 cents per $100 SI cents per $100 SI ISR Actual Cost vs Technical Cost $0.14 $0.12 $0.10 $0.08 $0.06 $0.04 $0.02 $- Actual Cost Attritional Weather CAT (Retained) CAT RI Cost Commission Other Expenses Profit $0.14 Actual Cost vs Selected Cost $0.12 $0.10 $0.08 $0.06 $0.04 $0.02 $- Slide 12 Actual Costs Selected Cost

13 Rate Adequacy Index ISR Rate Adequacy Index 14 ISR Rate Adequacy Index Rate Adequacy Index Target Source: Approximate. Estimated by Finity, using ISA data Slide 13

14 Mix of Cost Mix of Cost SME vs ISR Technical Cost 10 ISR Selected Cost 10 SME Selected Cost Attritional Weather CAT (Retained) CAT RI Cost Commission Other Expenses Profit Attritional Weather CAT (Retained) CAT RI Cost Commission Other Expenses Profit Source: Approximate. Estimated by Finity, using ISA data Slide 14

15 Rate Adequacy Index Rate Adequacy Index SME vs ISR Rate Adequacy Index 14 ISR Rate Adequacy Index 14 SME Rate Adequacy Index Rate Adequacy Index Target Rate Adequacy Index Target Source: Approximate. Estimated by Finity, using ISA data Slide 15

16 Rate Adequacy Index Rate Adequacy Index Rate Adequacy Index Rate Adequacy Index SME Rate Adequacy Index State Comparison Australia Rate Adequacy Index Target New South Wales Rate Adequacy Index Target 16 South Australia 16 Queensland Rate Adequacy Index Target Rate Adequacy Index Target Slide 16

17 Benefits of an RAI Provides a common view across organisation of true profitability Not distorted by weather/large claims experience More disciplined portfolio management Normalises for changes in risk profile Greater scrutiny on technical rates Forward indicator of profitability Slide 17

18 Questions Slide 18

Presenters About Finity Presenter Tim Andrews Phone +61 2 8252 3385 Email tim.andrews@finity.com.

19 Presenters About Finity Presenter Tim Andrews Phone tim.andrews@finity.com.au Sydney office Finity is a leading actuarial and management consulting firm to the general and health insurance industries. We employ around 80 professional staff in Australia and New Zealand. For more information, see our website at or contact us here: Australia Sydney Level 7, 155 George St The Rocks, NSW 2000 Melbourne Level 3, 30 Collins Street Melbourne, VIC 3000 New Zealand Auckland Level 27, 188 Quay St Auckland 1010 Wellington Level 16, 157 Lambton Quay Wellington 6140 Slide 19

20 Disclaimer Disclaimer provided by Finity Consulting Pty Limited ( Finity ) This presentation has been prepared for the Finity Commercial Lines Pricing Seminar held on 27 August Finity wishes it to be understood that the information presented at the seminar is of a general nature and does not constitute actuarial advice or investment advice. While Finity has taken reasonable care in compiling the information presented, Finity does not warrant that the information provided is relevant to a particular reader s situation, specific objectives or needs. Finity does not have any responsibility to any attendee at the conference or to any other party arising from the content of this presentation. Before acting on any information provided by Finity in this presentation, readers should consider their own circumstances and their need for advice on the subject Finity would be pleased to assist. Slide 20

Natural Perils Pricing When coming closer together means being further apart Tim Andrews & Stephen Lau

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