enterprise risk management for p&c insurance companies · 2010-05-18 · the enterprise risk...
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Enterprise Risk Management for P&C Insurance Companies
Andrew Matthews / Tony Newton
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The intention of this paper is to explore the Landscape of Enterprise Risk Management (ERM)Theory with a focus on application of ERM in thekey risk area for general insurers of commercialPricing and underwriting.
Purpose of Paper
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“…I define an executive’s job in 3 broad areas:
1. Communicating the Territory2. Building relationships and facilitating
interactions3. Producing results and outcomes”
Introduction/Agenda
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The Enterprise Risk Management (ERM) Territory – The context
Section 1
“The man who is tenacious of purpose in a rightful cause is not stricken by the frenzy of his fellow citizens”
- Horace, 1st Century BC
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Model Framework to Summarise Issues
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Summary Result by Company Type
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Small Companies Jumbo Regional Large National
Workers Compensation: Loss Ratios By Company Type
Average (MeanLoss Ratio)
Average(Deviationof Loss Ratio)
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It depends on the nature of business model, & how you conduct the business
• Personal Lines: diversification essential for managing catastrophe exposure
• Commercial Lines: we observed dramatic differences in financial performance among companies with different underwriting/pricing practices
Net Effect of Diversification Benefit/Penalty
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GenRe Analysis-Combined Ratios By Company 1996-2006
0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500%
Combined Ratio
1
11
21
31
41
51
61
71
81
Com
pany
Range of Combined Ratios By Company 1996~2006 (Eliminating Extreme Values)
BestPractice
Needs Management
Reproduced here with GenRe’s permission.
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“The possibility conversation focuses on what we want our future to be as opposed to problem solving in the past…This frees people to innovate, challenge the status quo and create new futures that make a difference” – Peter Block
Section 2: Building Relationships and Facilitating Interactions
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Model Framework to Summarise Issues
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Best Practice Pricing Risk Radar
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Pricing FrameworkPricing Framework –
Many interviews had different definitions but generally a theme around the Following:
Measure 2: Price Adequacy Index RateBook to Benchmark
Over Time
Measure 3: Point of SalePerformance Variation
AchievedRates
Sample Report-‘Segment’-Time Period-Tech Rate-Achieved Rate-Rate Book-Rate Strength-Point of Sale Variation-In Force-Quotes-New Business-Lapses
Measure 1: Rate Strength
Data WarehouseTechnology now allows
These rates to attachTo every risk.Technical/Statistical
Risk BasedBenchmark Rate
(Cost Plus)
Rate Book“Street Rate”
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Stories from each quadrant..
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“T.E Lawrence (of Arabia) aphorism that ‘Making war upon insurgents is messy and slow, like eating soup with a knife’ is difficult to appreciate until you have done it…Knowing how to win is a different thing from implementing the measures required to do it” – John A Nagl.
3. Producing Results and Outcomes
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“In my day we didn’tread many books, but we hit hard”
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• Reserves can only be a lagging indicator.- at 12 months, are almost never in an adverse
position to precipitate big change.- 24-36 months at best for true indications.
• Rate change indications on renewal are adequate only if:- constant policy form (SIRs, deductibles, limits etc)dominates the book of business and
- policies are rated on a true exposure basis, and- new business constitutes a small percentage ofpremium.
Leading Indicators vs Lagging Indicators
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1. Portfolio Volume2. Premium Rate Adequacy3. Portfolio Claims Performance
a) Claim frequency / per exposureb) Average Claim sizec) Loss RatioAttritional/Working LossesLarge (greater than a threshold)Event claims (accumulated from single event)
Lead Indicators – the 3 “must-haves”
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“Mispricing has an insidious dimension called the ‘winners curse’, because the likelihood of ‘winning’ severely underpriced business is many times the hit ratio for fully priced business. Underpriced business may represent 5% of quotes but 20% of your portfolio.”
McKinsey&Company, The Journey Revisited, 2004
Beware the “Winner’s Curse”
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Entrepreneurial Underwriting
Sales & U/writing
Brokers
Understands holistic impact of decisions.
Innovates and Adapts – uses endorsements and RI to control risk and carefully monitors key indicators.
Access to full “toolkit” of info required to do the right deal (not just book rate).
Follows up why quotes are not won. Looks to compete on more than price.
Case studies – large claims, legislative changes.
Efficient Processes – spends time where it makes a difference. External focus; looking for new
opportunities.
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Are Underwriters Abdicating Responsibility to Book Rates?
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• Underwriting psychology is more important tounderstand than underwriting philosophy.
• Most underwriters think frequency more than severity. It is more tangible.
• Most underwriters have not been in the position longwith their tail. The adverse development always belongs to others.
• Especially in larger companies, underwriting is not a career path, management is:
• Underwriters learn the unwritten rule early: No matter what management says, those with bigger books of business get rewarded. Premium is measured by underwriter, loss ratio and development is not.
Underwriting Psychology (from an Underwriter)
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• Effective price monitoring has to occur at thesame location as effective underwriting; theunderwriter’s desk.
• Price monitoring needs to become a real part ofthe evaluation process for rating agencies andanalyst. (Remember the grading chart).
• Senior Management and analyst emphasis on top line premium growth and expense control is often at odds with effective price monitoring.
Correcting the Decision-Making Process
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ConclusionRevisiting the framework from our introduction…1. Communicating the Territory: Goals – Acting Congruently
Say: What is the goal? What do we really want? If we achieve that what will it mean?Do: What is the risk manage along the way to ensure we act congruently with the goal?
2. Facilitating Interactions: Possibilities – Best Fit for PurposeWhat are the possibilities? How do we evaluate and identify most fit-for-purpose possiblity?
3. Producing Outcomes: Measure – AdaptWhat are the lead indicators that will measure/mark performance?How will we achieve a ‘speed to adapt’ (homing) and be resilient rather than perfect?
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Contact
Shaun Wang, [email protected], 678-524-9222Bob Faber, [email protected], 847-428-2533Andrew Matthews, [email protected], 03 96018056Paul Cassidy, [email protected] 9601 8061Antony Newton, [email protected] 9601 8082