Actuarial Role in the Client Relationship

CARe Seminar

June 2002

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Moderator

Steven B White, Guy Carpenter Instrat

Panelists

Pierre Laurin, Zurich North America

Michael Coca, Partner Re

Steven Kelner, American Re

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Actuarial Role in Client Relationship

Buyer/Ceding Company

Broker (if used)

Reinsurer

• Review reinsurance needs/goals

• Internal Actuarial Analysis

• Present goals/structure to external partners

• Analyze and recommend structure

• Gather, organize & present data to market

• Ceding company advocate with the reinsurer

• Analyze and recommend quotes

• Advice on structure/primary price

• Develop quote & present to broker/client

• Participate in UW/Claims audits

• Create pricing tools

The Buyer’s Perspective

Pierre Laurin, FCAS

Zurich Reinsurance Services

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Zurich Reinsurance ServicesNorth American Hub

R e in su ran ce R e la tio n sh ip M a n ag e m e nt

A d m in is tra tion

R e in su ra n ce D is trib u tio n U n it

U n d e rw rit in g

A c tu a ria l

L e g a l/W o rd ing

C a ta s tro p h e M o d e lling

R e in su ra n ce M a n u fa ctu rin g U n it

Z u rich R e in su ra n ce S e rv ices

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Goals of Structure

Review reinsurance needs and requirements before going the market

Increase analytics in establishing reinsurance structure

Provide management with enhanced tools for informed decision making

Establish retention levels at BU, Regional and Corporate level

Group Total Capacity perspective

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BU, Regional And Corporate Capacity

BU Capacity: retention based on – risk appetite,– allocated capital, – market factors, including expected portfolio’s profitability

Regional Capacity:– provides BU the same protection as external reinsurer– within regional management structure– taking advantage of negative co-variance within the organization

Corporate Capacity:– based on ZFS Group strategy– new business

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Time lines

Review of BU Reinsurance Strategy every six months, post Profitability reviews– Target Business – New Capacity requirements– Quota Share vs Excess of Loss covers– Allocated Capital Surplus– High level discussions on retention levels– Impact of Reinsurance coverage/exclusions on our target

markets– Tactical discussions on upcoming treaty renewals

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Time lines

120 days before renewal:– tactical review with CEO, actuary and CUO on goals of

reinsurance– Manufacturing works with SBU/BU to enhance understanding of

the LOB dynamics and risk profile– request for information

90 days prior– Actuarial and structural analysis begins with timely delivery of

data

75 to 60 days prior– presentation of findings and recommendations– structure and strategy confirmed

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Time lines 60 to 45 days prior

– presentation of goals and proposed structure to core external partners

45 days prior– go to market full market minimum 30 days prior to effective date

effective date – program placed

15 days after inception– profile and all administrative requirements met

90 days after inception– all treaties signed

The Broker Perspective

Steven White, FCAS

Guy Carpenter Instrat

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“The Relationship Wheel”“The Relationship Wheel”

PropertySpecialty

CapitalMarketsSpecialty

Guy CarpenterInstrat

Distribution/PortfolioSolutions

CatastropheModeling

Marsh Inc.and

GovernmentRelations

Guy Carpenter

RelationshipManagers

Client

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3. Quantitative & Qualitative Analysis of

Risks / Challenges

5. Execute in the Appropriate Markets -

Find the Right Partners

The Process SummaryThe Process Summary

4. Risk Management & Other Strategy

Development

1. Goals/Objectives

2. Risks/ Challenges that

may Impede Reaching Goals/

Objectives

6. Monitor & Manage

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Broker ActuaryWhere do we fit in

Marketing– The process starts with a “Beauty Contest” where

the point position is given to a broker or a direct market

– We help prepare the presentation highlighting our technical abilities

– Part of that presentation may be a state of the market to help set the expectations for the upcoming pricing/renewal

– Help understand the risk appetite of the ceding company

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Broker ActuaryWhere do we fit in

Interaction with the ceding company actuary– Provides a single point of contact for the ceding

company actuary– Develop “technical” indications for the deal– Two way sharing of information to help understand

the risk– Source of Industry “Market” information– Assist bringing Ceding Company and Reinsurer

towards a common understanding

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Product Pyramid

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Broker ActuaryInvolvement varies by type of deal and client

The types of deals that involve the highest level of actuarial input– Comparisons of alternate quotes and structure

• Which deal is most advantageous to the ceding company

• Depends on client objectives and risk appetite

• Typical criteria is to optimize the mixture of profit combined with allowable volatility

– Technical Services• Portfolio Optimization

• Capital Allocation

– Dynamic Financial Analysis

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Broker Actuary Who sets the price?

– Broker Actuary may give a Technical Price Indication

– The Market sets the price!

The Broker Market Reinsurer

Michael Coca, FCAS

Partner Re

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The Actuarial Role in the Client Relationship

– Advisory– Collaborative– Priorities– Coordination– Documentation

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Actuarial Role in the Client Relationship– Advisory

• Develop rate indications– Lead quotes– Alternative quotes

• Help address client needs– Advice on reinsurance structure– Advice on changes in/terms and conditions– Advice on primary pricing

• Assess profitability on renewal accounts– Monitor prior pricing indications versus actual emergence– Establish IBNR by class of business/type of reinsurance. This will enable pricing area

to provide underwriting with account experience by contract/treaty year at each renewal.

• New products/new approaches to existing products– Reinstatement backup covers/2nd event covers– WC Catastrophe covers– Shortfall covers

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Actuarial Role in the Client Relationship

– Collaborative• Work with Underwriting and Executive management to

– Develop pricing workflow interfaces with underwriting– Establish underwriting target returns by class/type– Set service standards

• Network with Underwriting teams and their clients– Participate in underwriting reviews– Attend specific Industry conferences– Assist underwriting and marketing in developing competitive products

• Coordination with claims department– ACRs– Advice on ceding company reserving practices

• Develop rapport with client/broker actuaries– Understand anomalies in the data– Gain access to information not readily available in submissions (ldfs,

price monitoring……)

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Actuarial Role in the Client Relationship

– Priorities• Create standardized tools and procedures

– Develop technical tools to enable the timely analysis of underwriting risk, and it’s pricing

– Organize workshops for underwriters to educate them in the understanding of risk analysis output from pricing models.

– Update pricing parameters for existing models.

• Pricing Response Time– Implement and deliver standard for submission

turnaround time– Develop a competitive edge as a lead reinsurer

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Actuarial Role in the Client Relationship

– Coordination• Establish checks and balances to assure that

pricing of business is appropriate– Peer review process– Build relationships with underwriting to assure pricing

priorities are met

• Create uniform and consistent pricing tools and parameters

– User friendly and efficient– Standardized pricing summary and assumptions– Process for evaluating and implementing new procedures

based on findings in current relevant literature.

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Actuarial Role in the Client Relationship– Documentation

• Decision memo process– Document the underwriting process results– Link between pricing and reserving– Bridge to evaluating business decisions through profitability

analysis– Early warning system for business monitoring

• Business Monitoring– Review profitability results with underwriting; by account,line,class

or business segment– Profitability analysis can be updated and reviewed quarterly (result

monitoring mechanism)– Develop initiatives/Strategies based on results– Creates accountability for underwriting results

• Price Monitoring by line– Severity trends– Price changes– Loss ratio movements– Effective rate changes

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Process OverviewSubmission Received Treaty U/W

Actuarial Process

Actuarial output & discussion with U/W

Bind Contract

Create Decision Memo

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Actuarial Role in the Client Relationship

Reserving

Profitability Analysis

Business Planning

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Actuarial Process

Account Data

Exposure Rating Loss Rating

Determine Best Indication

Model Variability of Results

Determine Overall Return on Insurance Transaction

Document the Underwriting Decision

Business Monitoring

Input

Expected Results

Variability of Results

Return on InsuranceTransaction

Decision Memo

Profitability Analysis

Fun

ctio

nActuarial Role in the Client Relationship

The Direct Market Reinsurer

Steven Kelner, FCAS

American Re

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Direct Reinsurance Process

Different business models and buyers– Large Caps & Super Regionals– Regionals and Small Caps– Specialty and Niche

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Direct ReinsuranceBusiness model and buyer differences

Large Caps and Super Regionals– Generally involve broker and direct markets– Well-staffed Ceded Reinsurance departments– Sophisticated buyers– Significant expertise and capabilities– Often suffering from data challenges due to

mergers and complex internal structures– Generally buying capacity not expertise

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Direct ReinsuranceBusiness model and buyer differences

Regionals and Small Caps– Where direct markets are involved brokers are often

limited to capacity products such as property catastrophe and WC catastrophe but there is frequent sharing of programs, more than 5 five years ago

– Experienced Ceded Reinsurance buyer– Less access to internal modeling and data

management expertise– Ability to access and manipulate data varies greatly

but sometimes extremely capable, more so than larger companies

– Sometimes buying expertise in addition to capacity

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Direct ReinsuranceBusiness model and buyer differences

Specialty and Niche– Mix of both worlds– Experienced Ceded Reinsurance buyer– Varied access to internal modeling and data

management expertise– Sometimes buying expertise in addition to capacity– Clients are often MGAs

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Direct ReinsuranceBroker dependent client

Data Issues

Data is gathered by the client and provided to the broker.– Data spec’s appear to be provided by the broker– Data is cleaned and organized, then sent to the

reinsurers.– The direct market is then provided the submission– Data issues brought to the client’s attention may

be answered by the broker

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Direct ReinsuranceBroker dependent client

Structure and pricing

General structure is usually provided by the broker– Markets get to quote and offer alternatives– Capacity is built around consensus pricing– Much less opportunity for the directs to influence

terms and conditions– Reinsurers generally play or don’t play based on

firm order terms

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Direct ReinsuranceOpen Competition

Data Issues

Data spec’s are provided by the competing markets– Those who develop the clearest and/or simplest

spec’s or provide the best support for data development have a competitive advantage and may drive the data gathering process.

– Data is then organized and sent to the reinsurers, often in the form of a standard submission.

– Ability to manipulate and understand the data may be a separate and unique competitive advantage

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Direct ReinsuranceOpen CompetitionStructure and pricing

Structure at times is a free for all– Markets get to quote and offer unique alternatives– Buyer then may decide based on the structure and

pricing as-is or may send the preferred structure to the market for re-pricing

– Capacity may be built around consensus pricing– The program may not go to the creator of the structure.– The lead may have influence over a significant portion

of the terms and conditions– Reinsurers may be asked to play in order to develop

capacity

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Direct ReinsuranceWhere the actuary fits in

As an actuary

Involvement with the client– May be the only guy who can explain what we mean

in the data request, where to get it, and how we use it.

– Often established as the contact in the geek-to-geek dialogue.

– May be asked to demonstrate how we got our price and/or why we suggest a structure.

– May be asked to opine on technical issues such as market loss trends or the validity of projections.

– May be asked to quantify for the client how operational assumptions impacted pricing decisions

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Direct ReinsuranceWhere the actuary fits in

As an Underwriter or Account Executive

Involvement with the client– Same as above but an issue of degree– More client involvement because some

underwriters do some of what the actuary can do– Some don’t want the actuary involved.– Someone has to explain DFA and ERM!

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Role of All Actuaries

It is unreasonable to expect a consensus among all parties– We all have to common goal of getting the

reinsurance placed– Within that goal we have different objectives– We must rely on our own judgment– We should be looking at where we agree as much

as where we disagree in pricing assumptions and methodology

• We need to make sure that the Underwriters / Brokers / Account Executives / Company Executives understand that we agree more than we disagree.

– We should avoid “dueling actuaries”