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Reserving and Pricing in Liability Insurance 2 nd International Istanbul Insurance Conference 30 September 2010 Prepared by Thomas Cordier, FCAS, FIA Aon Benfield Analytics
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Reserving and Pricing in Liability Insurance
2nd International Istanbul Insurance Conference
30 September 2010
Prepared by Thomas Cordier, FCAS, FIAAon Benfield Analytics
2Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Key Message
Investing in strong technical capabilities now is critical for future success
3Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Agenda
Section 1 Some facts about the Turkish liability market
Section 2 Playing by the rules
Section 3 Summary
4Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Agenda
Section 1 Some facts about the Turkish liability market
Section 2 Playing by the rules
Section 3 Summary
5Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Some Facts about the Turkish Liability Market
Source: Turkish Treasury, Insurance Supervision Board
6Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Some Facts about the Turkish Liability MarketGrowth of non-life business
Source: Turkish Treasury, Directorate General of Insurance
Non-life Premium Production of the last 5 years
0
2.000
4.000
6.000
8.000
10.000
12.000
2005 2006 2007 2008 2009
Years
TL million
0
5
10
15
20
25
30
%
premiums increase
7Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Some Facts about the Turkish Liability MarketHow much can the Turkish market continue to grow?
Country P&C GWP ($B) GDP ($B) Premium/GDP
U.S. 462.33 14,256.30 3.2%
U.K. 71.93 2,174.53 3.3%
Germany 67.10 3,346.70 2.0%
France 62.66 2,649.39 2.4%
Italy 44.09 2,112.78 2.1%
Spain 33.08 1,460.25 2.3%
Russia 12.48 1,230.76 1.0%
Austria 9.13 384.91 2.4%
Poland 5.89 430.08 1.4%
Turkey 5.61 617.10 0.9%
8Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Some Facts about the Turkish Liability Market
Profitability of insurance companies over the last 5 Years
0,00
1.000,00
2.000,00
3.000,00
4.000,00
5.000,00
6.000,00
7.000,00
8.000,00
9.000,00
10.000,00
2005 2006 2007 2008 2009
years
TL
mil
lio
n
0
5
10
15
%
equity profit roe
Source: Turkish Treasury, Directorate General of Insurance
9Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Some Facts about the Turkish Liability Market
Amendment of reserve regulation (2008)
High inflation levels (CPI circa 10% since 2005, was much higher previously)
Use of tariffs or regulator approval in a number of lines of business
Medical Malpractice reform (July 2010)
New reserving guidelines (expected in late 2010)
MTPL limits have increased to TL 175,000 ( March 2010)- further increase to TL 200,000 (January 2011)
Recent events affecting liability lines in Turkish Liability lines
10Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Agenda
Section 1 Some facts about the Turkish liability market
Section 2 Playing by the rules
Section 3 Summary
11Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Playing by the rules
Recent developments Increase in case reserve level for large liability claims observed in a number
of Central and Eastern Europe countries High inflation Increase in MTPL limits New reserving requirements
Impact: make projections more uncertain, actuaries increase ultimates. Reinsurers have already responded by increasing rates heavily.
Are we going to see an increase in reserves for primary insurers?
Have reinsurers over-reacted to these changes?
Actuarial drivers of reserving and pricing
12Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Playing by the rules
Tariffs Write liability lines at an unprofitable rate (legal minimum) may make sense
because it allows cross-selling opportunities How to identify customers who are genuinely profitable overall and those who
aren’t? Generalized Linear Models (GLM) combined with good underwriting standards
provide a way of monitoring expected gains/loss per insured by line and overall.
In the long run, companies with the most advanced rating system will end-up writing more “good risks”, leaving less profitable risks to their competitors (anti-selection). This remains true even in the presence of tariffs.
Regulatory constraints
13Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Playing by the rules
Capital Overall worldwide trend towards more disclosure and a better understanding
of risk (e.g.: Solvency II in Europe, Solvency Modernization Initiative in US) Lack of consistency within a company may lead to:
– Deteriorating underwriting results
– Increased volatility in earnings
– Increased regulatory capital requirements
Companies with an embedded internal capital model and a coherent risk management framework will be better equipped than others to face future uncertainty.
Risk Management and Internal Model
14Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Playing by the rules
Formulating a risk appetite that can flow down to all areas of the business Use of proportional reinsurance can help support growth As capital is built-up, shift to non-proportional reinsurance to cede less profit
and reduce volatility of earnings Insurers also benefit from brokers and reinsurer’s technical expertise
Internal Model helps optimize reinsurance program and it ensures that your company receives sufficient capital credit for your reinsurance program
Reinsurance to support growth and reduce volatility of earnings
15Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Playing by the rulesReinsurance to manage capital
0,0
50,0
100,0
150,0
200,0
250,0
300,0
350,0
400,0
450,0
Available
Required
Capital reliefthroughreinsurance
16Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Agenda
Section 1 Some facts about the Turkish liability market
Section 2 Playing by the rules
Section 3 Summary
17Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Summary
The Turkish liability market is going through a period of great changes Even in the presence of tariffs companies can select the best risks by using
GLM and a strong underwriting process An embedded risk management process and a well-designed internal model
will help optimize capital Reinsurance is a great tool to align a company’s exposure to its risk appetite,
manage capital and reduce earnings volatility
Companies that invest in strong analytical capabilities now will gain a decisive competitive advantage for the next few years
18Reserving and Pricing in Liability Insurance | Thomas CordierInternational Istanbul Insurance Conference | 30 September 2010
Contact List
Thomas Cordier, FCAS, FIAAon Benfield London
Analytics+44 207 522 [email protected]
Müge DirenAon Benfield Istanbul
Senior Account [email protected]
