price monitoring a practical example primary company perspective larry schober pricing actuary

Price MonitoringA Practical ExamplePrimary Company Perspective

Larry SchoberPricing Actuary

Price MonitoringA Practical Example

The views expressed are those of the speaker.

They are not necessarily the views of the CAS, AEGIS, …


• Price Monitoring:• General approach• Benefits – what’s in it for me• Hurdles• Observations on Property• Shortfalls / Pitfalls


Failure to Price Monitor

"Far greater than hurricanes, earthquakes, asbestos and pollution, the failure to price monitor on a visible and consistent basis through the 90's was the source of the Property and Casualty Insurance Industry's greatest catastrophe...“

David Cash

CAGNY 2003


• AEGIS – Associated Electric and Gas Insurance Services, Ltd.– Utility Industry (electric & gas) mutual insurer.

– Variety of commercial casualty lines and property to monitor.• Variety of coverages to monitor.

– High excess, with varying retentions and limits to keep track of.


• Definition: Measure changes in rate levels achieved from one period to the next.– More than just premium changes.

• Example: change exposures by half, premium is halved, but pricing is unchanged.– Term is fraction of a year, pricing should be

unchanged.

Price MonitoringGeneral Approach

• Price Monitoring:• General approach• Benefits – what’s in it for me• Hurdles• Observations on Property• Shortfalls / Pitfalls

Price MonitoringGeneral Approach – Beginning Rigorous Monitoring

• Where to start price monitoring?– We began well over a decade ago.

• Begin at the beginning – started with largest. – Start simply, but start rigorous monitoring.– e.g. began with domestic; expanded to foreign.

• Expand as coding improves, or business expands.

Price MonitoringGeneral Approach – Beginning Rigorous Monitoring

• Opportunity to be involved at the outset:– New rating plans or class systems.

– Policy form, endorsements and exclusions.

• Opens the door to more than just making rates, premium levels and walking away. – For the primary co., collateral contributions are a

big follow-on effect of price monitoring.

• Ways to Price Monitor?

Price MonitoringGeneral Approach – Ways to Price Monitor

• Aggregate Data – portfolio.

• Price change on renewal– Match renewals w/like terms.

• Price change on renewal, and restate for exposure change.

• All renewal policies– Some adj. for limit and SIR.

• All policies – new, renewal – Re-rate individual policies.

Increasing detail,

complexity and

accuracy.

a. High retention ratio / homogeneous book

b. Insureds in flux:consolidationderegulationcompetition

c. Changing exposures, limits, retentions

d. New business

e. Existing database• All policies – new, renewal

– Re-rate individual policies.

Doing the detailed work anyway…

Price Monitor a step in ratemaking and reserving.

The "easy" price monitors were additional work.

Price MonitoringGeneral Approach – Index Calculation

• Re-rating sets a standard, or benchmark, for comparing what was collected (actual prem.).

• Re-rating standardizes changes in:– Exposure – Retention – Exclusions

– Limit – Term – Inflation

• The index (ratio of actual to benchmark) marks the performance of collected premium to a consistent standard across all policies.

Price MonitoringGeneral Approach – Index Calculation

• Taking ratios of indexes measures the change, from period to period, due to rates, merit rating factors and market forces.

Sall insureds

Sall insureds

Exposure (t) x Rate (t) x Relativity (t) x ILF(t) x Subj Mod (t)

Exposure (c t ) x Rate (c) x Relativity (c) x LS (c t ) x LF (c t )

Actual

Benchmark =

• Index Calculation:

Price MonitoringGeneral Approach – Presentation of Results

• How the index changes from period to period (taking ratios of indexes) measures rate change achieved AFTER changes in limit, retention, exposure, … – while controlling for shifts in SIR, limit ...

• In the benchmark, the impact of changing limit or SIR is quantified from a severity fit.– Refitting = monitoring underlying shifts .

• Index can be converted to an adequacy point…


• Start with index that yielded an adequate premium level (taken from latest rate review).– Latest index value from most recent rate review,

adjusted for any indicated (def. / red.).

• Convert index to adequacy point: index of 0.75 yielded adequacy in the latest rate review;– Index of .80 > .75, so adequacy point is > 1.0– an index reading of 0.80 is an adequacy point

of 1.07 (1.07 = .80 / .75)


Relative Adequacy monthly points

0.0

0.5

1.0

1.5

2.0

2008

.12

2007

.12

2006

.12

2005

.12

2004

.12

2003

.12

2002

.12

2001

.12

2000

.12

1999

.12

1998

.12

Ad

eq

ua

cy

Le

ve

l

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Wri

tten

Pre

miu

m (

$ m

illio

ns)

Volatile monthly points

“smoothed”

Actual Premium:

bars on the bottom


Displays two key concepts1. Changes in pricing (height of jump)2. Adequacy of premium dollar (relative to 1.0)

• Visual display of changing adequacy AND pricing.

• Directly relates pricing changes to changing rate adequacy.– Improves dialog with underwriting


• Since data is by contract, it contains all new, renewal and lost business.

• By contract (policy), so you can monitor new, separate from renewal and lost.– Test pricing assumptions.

• What about new business?


• New business has a lower (or higher) adequacy point. Now what?– Check for new Underwriting Guidelines.– Position in the underwriting cycle plays a role.

• Hard market – new is likely stronger• Soft market – new is likely weaker• Successfully skimming the cream, or buying new

business? What contribution can we make?

Price MonitoringBenefits of Monitoring

• Price Monitoring:• General approach

• Benefits – what’s in it for me • Hurdles• Observations on Property• Shortfalls / Pitfalls


1. Decision making.– Setting targets:

• Trend & pricing changes – U/W on a treadmill.• Target pricing by account (with exper. rating).• Make the monitor a part of pricing “culture”.

– Industry comparisons – Test indicated rate change vs. achieved change– Stratification (large vs. small pricing; high

attachment vs. low attachment pricing).


2. Collateral contributions are a big follow-on benefit of price monitoring.– Simple act of monitoring leads to u/w changes.

3. Underwriters share ownership of report. – More frequent contacts with underwriting– They ask for more information.

4. On-level factors for ratemaking.– Natural by-product of monitoring


5. Helps in reserving – exposure to loss and layering of exposure to loss.– Ceded XOL contracts and IBNR by layer.

6. Monitor pricing by underwriter…– Possibly a source of contention.


7. Useful back-test of trend using monitor:– are on-level loss ratios “flat” …

Actual Loss RatiosTrend in On-level loss ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Policy Year

Lo

ss

Ra

tio

On-Level Loss RatiosTrend in On-level loss ratios

0%

20%

40%

60%

80%

100%

120%

140%

160%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Policy Year

Lo

ss

Ra

tio




0%

20%

40%

60%

80%

100%

120%

140%

160%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Policy Year

Lo

ss

Ra

tio


0%

20%

40%

60%

80%

100%

120%

140%

160%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Policy Year

Lo

ss

Ra

tio

Not enough trend




0%

20%

40%

60%

80%

100%

120%

140%

160%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Policy Year

Lo

ss

Ra

tio


0%

20%

40%

60%

80%

100%

120%

140%

160%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Policy Year

Lo

ss

Ra

tio

Too much trend

Price MonitoringHurdles

• Price Monitoring:• General approach• Benefits – what’s in it for me

• Hurdles• Observations on Property• Shortfalls / Pitfalls


1. Need to be involved on a policy-level basis.– Big challenge, but big follow-on rewards.

2. Footing to the financials.– Increases credibility & reliability of monitor…– but complicates it as well:

• Data reconciled to Accounting data, but at the detailed coverage level suitable for re-rating.


3. Takes Time: initially, 2+ years for comparison.– Data Quality– New Business (earlier)

• New business in existing line – comparable• New business in new line – hard to compare.

4. Programming – not for the faint of heart. – Contracts are customized – exceptions.


5. Detail of data capture down to the level at which underwriters rate – coverage level.– Primary closer to data than reinsurer.

6. Changing systems.– New rating plans.– New underwriting systems.– Not “once and done”…

Price MonitoringProperty

• Price Monitoring:• General approach• Benefits – what’s in it for me• Hurdles

• Observations on Property• Shortfalls / Pitfalls


• Personal Lines : lots of similar policies, little judgment.

• Commercial Casualty : fewer policies, more judgment.

• Commercial Property : even fewer policies (more layers), but the most judgment.

– Judgment makes property programming difficult.


• Property - more complicated (less standardized) line than casualty.

– Approach for property: simpler than casualty.• Pricing on renewal, re-rate to expiring, adjusting for

changes in exposure and layer. • Do you pare back renewal coverages, or build up

expiring to compare renewals?

– Benchmark rating - which benchmark?– What scale are they using - real differences?

Price MonitoringProperty – Changes by Band

Expiring Premium Split by Rate Change Bands

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Month

%t

of E

xpiri

ng P

rem

. w

ith C

hang

e in

Ban

d

More than +20.0%

+10.0% to +20.0%

+2.5% to +10.0%

0.0% to +2.5%

–2.5% to 0.0%

–10.0% to –2.5%

–20.0% to –10.0%

Less than –20.0%

Price MonitoringProperty – Average

Monthly Property Renewal Rate Changes

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

1 2 3 4 5 6 7 8 9 10 11 12

Month

Rat

e C

han

ge

in M

on

th

Average

Price MonitoringProperty – Average with Maximum and Minimum

Monthly Property Renewal Rate Changes

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

1 2 3 4 5 6 7 8 9 10 11 12

Month

Rat

e C

han

ge

in M

on

th

Average Maximum Minimum

Price MonitoringShortfalls / Pitfalls

• Price Monitoring:• General approach• Benefits – what’s in it for me• Hurdles• Observations on Property

• Shortfalls / Pitfalls


1. Exposures: underwriters think actual, the monitor only sees our “proxy” exposure:– May legitimately be pricing for exposure

changes we fail to see.– Inflation sensitive exposures need adjustment.

2. It takes a computer to really mess things up:– Drive to automate, but changing endorsements,

forms, coverages were speed bumps.


3. Continuing to monitor during a soft market.– Need commitment by Senior Management.– Everyone loves to hear about pricing when

prices are going up. – “Good” news when monitoring during the hard

market builds “street cred” with underwriters.

4. Finally, price monitoring quantifies - that’s our strength as actuaries -– but it’s still a model.


• Correcting the shortfalls (avoiding the pitfalls) - feedback loop with positive results:

– Frequent review forces us to (re)-examine:

• Trend• Severity• Coverage changes

– Reinforces underwriter contact.

Price MonitoringA Practical Example – Conclusion

• Price monitoring helps us speak rationally to:– Management

– Colleagues in Underwriting

– Reinsurance partners

• Let’s see how …

price monitoring a practical example primary company perspective larry schober pricing actuary

Documents

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