Natural Perils Pricing When coming closer together means being further apart Tim Andrews & Stephen Lau Finity Personal Lines Pricing and Portfolio Management Seminar 30 April 2015 2015 Finity Consulting Pty Limited
When coming closer together..means being further apart $50 or $3,000 2
Natural Peril Pricing Approaches Moving closer together
What insurers did 5-10 years ago Reinsured cat cost Retained cat cost Blend industry and insurer data. Limited variation by zone Attritional weather Analysed separately based on 3-5 years data 4
Common practice today Reinsured Cat Cost Retained Cat Cost Other weather Cat model results and other external data used to vary results by zone Maybe 5-10 years data Riverine Flood Bushfire Address level. Pool based on insurer data, industry data and other data 5
Role of catastrophe models in pricing Pros Alignment with reinsurance pricing Can fall out of reinsurance process Efficiency one model Provide risk relativities Cons Transparency Licensing issues Other sources of risk relativities that are easier to access Challenges at address level Non-modelled perils in particular problematic 6
An alternative approach Involves assessment of reinsured cost of each peril Net Cost of RI Gross Cyclone Gross Earthquake Gross Bushfire Gross Flood Gross Storm Separate consideration of the pool, and use of external data and heat maps to allocate by region 7
Two key analyses for each peril 1. The size of the pool You may decide the Australia wide hail cost is $300m pa Property factors 2. Variations by location, property type. Build model for Australian population to generate target pool 5.0 1.0 0.4 Roof type relativities Hail risk heat map Tile 1.0 Metal 0.7 Sum Insured shape 8
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Index (Latest year set at 100) Estimation of Pools An estimate based on as much data as you can find Insurer Data Weather Data 70% 60% 160 National Storm Score Index (8 Year Rolling Average) 140 50% 120 40% 100 30% 80 60 20% 40 10% 20 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* Selected 0 Earthquake Cyclone Bushfire Storm External data such as FFDI 9
An alternative approach Component Hail, Windstorm, Flash flood (potentially separately) Riverine Flood Bushfire Earthquake Cyclone Total Gross Cost Indicative $1.2bn $0.4bn $0.2bn $0.4bn $0.4bn $2.6bn 10 Around 35% loss ratio
Some advantages with alternative approach Its simple Consistency about where cost is allocated Components can be linked to data regarding underlying peril Heat maps will then make sense Largest component, being storm, is more robust Use of longer time periods means less likely to underestimate or overestimate cost More visibility of net cost of reinsurance 11
Very low wind, medium rainfall High rainfall, very low wind Medium wind, low rainfall Very strong winds, low rainfall Low rainfall, strong wind 13
Very low wind, medium rainfall High rainfall, very low wind Medium wind, low rainfall Very strong winds, low rainfall Low rainfall, strong wind 14
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 A closer look at the daily wind gusts in Melbourne vs Cairns Daily Maximum Wind Gusts: Speed (km/h) and Direction (Years 2009-2013) Very strong winds from the North, weaker winds from the south N NNE NE ENE E ESE SE SSE S SSW SW WSW W WNW NW NNW 140 120 Cairns Airport 140 120 Melbourne Airport 100 100 80 80 60 40 20 0 60 40 20 0 15 Weaker winds (typically around 40km/h) coming from the south-east
Actual insurer prices Moving further apart
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Standard Dev How Have Premiums Moved Between Insurers? 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Standard Deviation of Premiums Between Insurers NSW and QLD premiums are becoming further apart between insurers NSW North QLD South QLD SA TAS VIC WA Quoted Quarter 17 Source: Finity Market Finesse
Standard Dev Insurers rate flood very differently 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Standard Deviation of Premiums Between Insurers as at 2015 NSW VIC North QLD No Flood Risk QLD SA WA TAS NT Flood Risk 18 Source: Finity Market Finesse
Insurer 1 Insurer 2 Insurer 3 Insurer 4 Insurer 5 Insurer 6 Insurer 7 Insurer 8 Insurer 9 Insurer 10 Insurer 11 Insurer 12 Insurer 1 Insurer 2 Insurer 3 Insurer 4 Insurer 5 Insurer 6 Insurer 7 Insurer 8 Insurer 9 Insurer 10 Insurer 11 Insurer 12 Insurer 1 Insurer 2 Insurer 3 Insurer 4 Insurer 5 Insurer 6 Insurer 7 Insurer 8 Insurer 9 Insurer 10 Insurer 11 Insurer 12 A Premium Example of a Flood Prone Area 5,000 4,000 3,000 2,000 1,000 0 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 5,000 4,000 3,000 2,000 1,000 0 19
Insurers are more aligned on flood...but rates are moving apart Flood premiums vary significantly between insurers Almost all insurers have modelled flood peril in their premium rates Price impact to customers is huge 20
Unsophisticated Insurer Rating for Perils $845 No address level rating for bushfire $845 No address level rating for storm $845 $845 $796 $796 $796 $796 $796 $796 $796 Suburb loading may reflect bushfire risk (and other perils) for the area However loading may vary significantly between neighbouring suburbs
A Typical Insurer Rating for Perils $1362 $1180 $1180 $1180 $1362 $1180 $1180 $1230 Address level rating for bushfire for addresses close to bush No address level rating for storm Otherwise most addresses have the same premium $1180 22 $1190 $1215
Sophisticated Insurer Rating for Perils $2250 Address level rating for bushfire $2030? Indication of address level rating for other perils $1920 $2050 $2252 $1950 $2018 $2035 $1730 $1908 $2100 23
Our Perils Rating Scorecard for Insurers Flood Bushfire Storm Cyclone % Insurers Rating for Peril 95% 70% 20% 80% Level of sophistication Sophisticated models but outputs vary significantly Mostly fairly basic modelling approach Unsophisticated Limited Address Rating Limited use of proximity to coast 24
Final Thoughts Enhancements to perils pricing have added price differences across insurers Be careful if you don t have peril models 25 Managing Customer Impact is Challenging
Questions? 26
Contact Tim Andrews Principal Tel: +61 2 8252 3388 Stephen Lau Senior Consultant Tel: +61 2 8252 3494 www.finity.com.au www.finity.com.au
Distribution & Use This presentation has been prepared for the Finity Consulting Personal Lines Pricing & Portfolio Management Seminar, held on 30 April 2015. It is not intended, nor necessarily suitable, for any other purpose. Third parties should recognise that the furnishing of this presentation is not a substitute for their own due diligence and should place no reliance on this presentation or the data contained herein which would result in the creation of any duty or liability by Finity to the third party. Reliances & Limitations 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.