2010 Ratemaking Survey Presented By: Laura Stevens, ACAS, CCRA - - PowerPoint PPT Presentation

2010 Ratemaking Survey

Presented By: Laura Stevens, ACAS, CCRA John Lewandowski, FCAS, MAAA CAS Annual Meeting Washington, D.C. November 9, 2010

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Objective

§ Companion to 2008 CAS Reserving Survey § Ratemaking Survey initially proposed in GRIP paper § Desire to coordinate U.S. with UK, Australia efforts § Desire to cover all aspects of pricing (Personal, Commercial, London market & Reinsurance § Focus on what people are actually using § Global coverage with a comparison of results by region § Report back to the professions (GIRO, CAS Annual, RPM) § Important part of the CAS Research Centennial Goals

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Process

§ UK, US and Australian working parties § Started with Reserve Survey questions § Three separate sets of questions, three interpretations of scope, three time zones….. § Each group came up with recommendations and reviewed other teams questions § Final survey was product of US/UK working parties § Survey included:

• 34 Common Questions
• 11 US questions
• 14 UK questions

§ Rolled out early July until mid-August to:

• CAS mailing list
• GIRO mailing list
• LMAG
• CAE

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Overall Response rate

• 913 from the US
• 89 from Canada
• 135 from the UK
• 46 from Europe (17-Switzerland, 6-Germany, 5-Ireland)
• 92 from Rest of the World (Bermuda-19, China-10, Uruguay-8, Australia-6)
• 20 from out of this world!

602 (46%) finished the survey

• 46% from US
• 34% from Canada
• 49% from UK
• 63% from Europe
• 42% from Rest of World

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Response by Employer Type

Europe ROW UK US Total Broker/Intermediary 2% 3% 8% 3% 3% Small consulting 7% 4% 1% 5% 4% Large consulting 11% 5% 8% 5% 6% Insurance Information Entity (ISO, NCCI, etc.) 0% 2% 0% 4% 3% Lloyds Syndicate 2% 2% 19% 0% 2% Primary Insurer (Multi-National Multiline) 33% 19% 34% 15% 18% Primary Insurer (National Multiline) 11% 28% 17% 41% 36% Primary Insurer (Regional or Monoline) 0% 13% 4% 19% 16% Regulatory Body 2% 2% 1% 2% 2% Reinsurer 33% 22% 10% 6% 9% 100% 100% 100% 100% 100%

• 70% of respondents from Primary Carriers
• Only 9% from Reinsurers – largest for Europe/ROW
• Brokers fairly small representation, largest concentration from UK

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Response by Length of Experience

• 50% of the responses were from individuals with < 10 years. This increased to 70% for

non-US responses.

• 75% of the respondents from the UK have < 10 years of experience compared to 46% for

US.

• Only 7.5% of responses from the UK have more than 15 years experience compared to

36% for US.

• Nearly 80% are credentialed actuaries, another 15% under the course of study to become

actuaries.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0-­‑5 ¡years 6-­‑10 ¡years 11-­‑15 ¡years 16-­‑20 ¡years 21+ ¡years EU ROW UK US/Canada

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Response by Current or Most Senior Position

• Nearly 50% of responses were from a Senior or Lead Actuary
• 18% of responses were from a Chief Actuary/Practice Leader incl. management of a

business segment

0% 10% 20% 30% 40% 50% 60% Student Analyst Mid ¡-­‑level Senior Chief R&D EU ROW UK US/Canada

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Response by Primary Role/Area of Specialty

• Slightly more than 50% indicated their principal role is Pricing
• Approximately 15% indicated they perform Reserving/Pricing and Capital modeling.

0% 10% 20% 30% 40% 50% 60% 70% Pricing Mixed ¡role ¡incl ¡pricing Underwriting Reserving Capital ¡Modeling ERM MI ¡& ¡reporting Regulatory Product ¡Management R&D Reinsurance EU ROW UK US/Canada

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Pricing Techniques What is your main product line?

• Personal Lines dominate
• UK lowest percentage personal lines, but more diverse than other regions

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% PL: ¡Auto PL: ¡Prop. ¡& ¡Other CL: ¡Auto CL: ¡GL ¡& ¡Other CL: ¡Property Prof ¡Liab ¡ex ¡Med Medical RI: ¡Excess RI: ¡Primary RI: ¡Property RI:P/L,Struc,Marine Work ¡Comp/EL Surety,A$H,Marine EU ROW UK US/Canada

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Pricing Techniques What are the top 3 product lines?

• Personal Lines Property is second largest line for nearly 30% of US respondents

0% 5% 10% 15% 20% 25% PL: ¡Auto PL: ¡Prop. ¡& ¡Other CL: ¡Auto CL: ¡GL ¡& ¡Other CL: ¡Property Prof ¡Liab ¡ex ¡Med Medical RI: ¡Excess RI: ¡Primary RI: ¡Property RI:P/L,Struc,Marine Work ¡Comp/EL Surety,A$H,Marine EU ROW UK US/Canada

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Pricing Techniques Technique - Main Line of Business

• Experience and Exposure Rating most common for Commercial lines
• Freq/Severity and Predictive Modeling popular for Personal Lines
• Judgment commonly used for several lines

0% 5% 10% 15% 20% 25% Experience Exposure Manual-­‑Advis./Indep Loss ¡rating Freq/Sev Predictive Comparative Market Telemetrics Stochastic Judgment

Personal Commercial Other Reinsurance

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Pricing Techniques

Personal Lines Individual Account

Pricing Techniques By Region

0.0% 5.0% 10.0% 15.0% 20.0% Experience ¡rating Exposure Manual Loss Freq/Sev Predictive Compariative Market Telemetrics Stochastic Judgment EU ROW UK US/Canada

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Pricing Techniques Commercial Lines Individual Account Pricing Techniques By Region

0.0% 5.0% 10.0% 15.0% 20.0% Experience ¡rating Exposure Manual Loss Freq/Sev Predictive Compariative Market Telemetrics Stochastic Judgment EU ROW UK US/Canada

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Pricing Techniques Personal Lines Methods By Region

PL methods

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Loss ratio Market conversion Market analysis One/Two way Curve fit Clustering Credibility PCA Spatial smoothing Flood/Cat GLM Discrete GLM Cts GAM GNLM Behaviour GLM Behaviour GAM Stochastic EU ROW UK US World

Europe uses more sophisticated models

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Pricing Techniques Commercial Lines Methods By Region

CL methods

0% 5% 10% 15% 20% 25% 30% 35% L

• s

s r a t i

• M

a r k e t c

• n

v e r s i

• n

M a r k e t a n a l y s i s O n e / T w

• w

a y C u r v e f i t C l u s t e r i n g C r e d i b i l i t y P C A S p a t i a l s m

• t

h i n g F l

• d

/ C a t G L M D i s c r e t e G L M C t s G A M G N L M B e h a v i

• u

r G L M B e h a v i

• u

r G A M S t

• c

h a s t i c EU ROW UK US World

Commercial Lines tend toward simpler and stochastic methods

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Pricing Techniques Data Sources (Trend) by Region

0% 5% 10% 15% 20% 25% I n t e r n a l A c c

• u

n t ¡ s p e c i f i c P u b l i c D e m

• g

r a p h i c C r e d i t C

• m

p e t i t

• r

V e h i c l e N a t u r a l ¡ p e r i l I n d u s t y ¡ O r g a n i z a t i

• n

N

• n
• ­‑

i n s u r a n c e C

• n

s u l t a n t C a t ¡ M

• d

e l J u d g e m e n t E c

• n
• m

e t r i c EU ROW UK US/Canada

US is region with largest reliance on Industry or Advisory Data Sources UK is region with largest reliance on Account Specific information

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Pricing Techniques Loadings – Profit Provision

• Combined Ratio most common
• Return on Capital popular in US/Canada, Capital model in UK

0% 5% 10% 15% 20% 25% 30% 35% 40% Combined ¡ratio Pct ¡Premium Cashflow ROC Capital ¡model Price ¡Opt Percentile N/A EU ROW UK US/Canada

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Pricing Techniques Loadings – Large Losses

0% 10% 20% 30% 40% 50% 60% 70% 80% No ¡adjustment Cap Separate ¡model EU ROW UK US/Canada

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Pricing Techniques Loadings – Type of Cat Models Used

0% 5% 10% 15% 20% 25% 30% 35% 40%

Single ¡vendor model Vendor ¡w/ ¡in-­‑ house ¡adjust. Pure ¡In-­‑house Blended Actual experience

EU ROW UK US/Canada

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Pricing Techniques

Types of Platforms Used for Pricing

Personal lines

50 100 150 200 250 300 S/S formula S/S Programming Pricing package Custom built model In house Web In house Desktop EU ROW UK US

Commercial lines

20 40 60 80 100 120 140 S/S formula S/S Programming Pricing package Custom built model In house Web In house Desktop EU ROW UK US

Liability

20 40 60 80 100 120 140 160 S/S formula S/S Programming Pricing package Custom built model In house Web In house Desktop EU ROW UK US

Reinsurance

10 20 30 40 50 60 70 S/S formula S/S Programming Pricing package Custom built model In house Web In house Desktop EU ROW UK US

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Pricing Techniques

Form of Estimates Given to Employer/Client

• More than 80% provide a final price subject to UW discretion
• Range of Estimates less than 10% of the time

0% 20% 40% 60% 80% 100%

Price ¡recommendation Range ¡of ¡Estimates Point ¡Est. ¡& ¡Quartiles Non-­‑negotiable ¡price Optimised ¡Price EU ROW UK US/Canada

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Pricing Techniques

Internal Price Monitoring

• 80% monitor at least renewal price levels, highest in UK/EU
• 20% do not monitor internal price levels at all or only follow industry trends

0% 10% 20% 30% 40% 50% 60% 70% New ¡& renewal Renewal account Renewal portfolio Industry ¡trend Do ¡not monitor EU ROW UK US/Canada

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0% 5% 10% 15% 20% 25% 30% 35% 40%

Yes+understand uncertainty Yes+not understand uncertainty No+not understand uncertainty No+understand uncertainty Not ¡sure

EU ROW UK US/Canada

Views

Do you believe that the price monitoring process at your company/client is sufficiently robust and reasonable enough for the intended purpose and the clients/senior management have sufficient understanding of the uncertainty inherent in the results?

• 57% believe the process is sufficiently robust
• More than 20% believe it is not robust, but uncertainty in understood

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Who is involved in producing the pricing deliverable?

§ Underwriters - Leads Process (UK-26%, US-10%) § Statisticians - Core Member or Leads Process (approximately 20% globally) § Senior Mgmt - Core Members or Leads Process (UK-29%, US-45%) § Brokers - No Involvement (UK-45%, US-58%) § Actuarial Consultants - No Involvement (UK-79%, US-59%)

Operations

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Regional Questions

For Actuaries Operating in North America Credibility Techniques

52% 13% 4% 8% 14% 9%

Claim ¡count E(Claim ¡count) Loss ¡volume E(Loss ¡volume) Premium Subjective

Credibility Weighting Exposure & Experience Rating Approaches Used to Assign Credibility

20% 45% 26% 7% 2% Bayesian Classical Judgment 3-­‑way Other

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Regional Questions

For Actuaries Operating in North America Determining Rate Need Uncertainty

0% 5% 10% 15% 20% 25% 30%

Run ¡various methods Vary ¡key assumptions to ¡stress ¡test Simulation modeling Numerical Procedure (i.e., ¡FFT) Parametric Stochastic model Judgment Not Used/Not Applicable Individual Account Portfolio

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Regional Questions

For Actuaries Operating in North America Determining Correlation/Diversification

0% 5% 10% 15% 20% 25% 30% 35% Data ¡Analysis Published ¡Research Judgment Bootstrapping Sqrt(Sum ¡squares) Copulas Tracking ¡results Do ¡not ¡reflect ¡in ¡results.

• Nearly 1/3 do not reflect correlation/diversification in their results
• When reflected, most common are judgment and analysis of own data

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Regional Questions

For Actuaries Operating in North America Predictive Modeling Tools

Classification Ratemaking Territorial Ratemaking

0% 10% 20% 30% 40%

Bailey ¡MB Backwards ¡regression GLM Decision ¡tree Neural ¡net Machine ¡learning Random ¡forest GLMM GAM MARS

0% 5% 10% 15% 20% 25%

Univariate Normalized ¡univariate GLM GL ¡Mixed ¡Models Decision ¡tree Spatial ¡smoothing Clustering Other

• Nearly 2/3 rely on internal data
• < 10% use Vendor/Advisory Org data

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Regional Questions

For Actuaries Operating Outside of North America Methods

• Integration with reserving and capital,
• More with reserving, it seems

10 20 30 40 50 60 70 80 90 Cat loads Investment Claim trends IBNR Expected LR Business plan RI recovery Capital loading Market Cycle # of Responses EU ROW UK US

Which elements of pricing are integrated with Reserving and Capital models?

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Regional Questions

For Actuaries Operating Outside of North America Impact of Solvency II on Pricing

• More than ½ in UK indicate there is some impact to pricing

0% 10% 20% 30% 40% 50% 60%

Change ¡in ¡target Increase ¡in controls Reduction ¡in resources No ¡impact Not ¡Sure

EU ROW UK

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Views

Constraints to Using Stochastic Methods in Pricing

• Some overlap with responses
• Principal reasons vary by region : Data limitations (EU/ROW), No benefit (UK) and Lack of familiarity (US)

0% 10% 20% 30% 40%

N

• ¡

n e e d ¡

• r

¡ b e n e f i t D a t a ¡ l i m i t a t i

• n

s I n

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s e ¡ b u i l d ¡ e x p e n s i v e I n

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h

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s e ¡ b u i l d ¡ c

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p l e x U n f a m i l i a r ¡ w / m e t h

• d

s N

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h

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s e ¡ e x p e r t i s e C

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m e r i c a l ¡ M

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e l s ¡ e x p e n s i v e T

• ¡

d i f f i c u l t ¡ t

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e x p l a i n

EU ROW UK US/Canada

32

Views

Value of Educational Support

• US seems to leads other regions

0% 10% 20% 30% 40% 50% 60% 1-­‑Inadequate 2 3 4 5-­‑Significant ¡Value EU ROW UK US/Canada

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How can the professional organizations improve educational opportunities for pricing actuaries?

§ Seminars (preferably webinars) that cover a detailed technical example § More hands on training (e.g., computer lab sessions) § Downloadable spreadsheets that work through a particular method/ approach § Publication of a pricing handbook § More information on methods that are being used overseas § Sessions at (CAS) meetings tend not to be balanced (too focused or too general) and are too short.

Write-In Comments

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Next steps

§ Survey will be jointly analysed by US/UK working parties § Full report written up and published § Summarized results presented in Actuarial Review § Further presentations booked

• CAS RPM Seminar (March 2011)

§ Further presentations considered:

• UK Pricing Seminar (June 2011)

§ Future Ratemaking Survey