Actuarial Value
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Actuarial Value
John Burville
May 19th, 2004
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I am an Actuary
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A “herd” of Actuaries
Sure we have body language!?
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Get to the purpose already ...
Actuarial Value
The drive for profitability
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The Story of ACE
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Acquisition Trail1995 - 1999
Lloyds syndicates
Catastrophe Reinsurer (Tempest)
Westchester (USA)
CIGNA’s worldwide P&C
Capital Re
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ACE Transformation
Year Location Lines Of Business
Number of Staff
Total Reserves
Total Assets
1994 Bermuda XL, D&O 40 $1.2bn $3bn
1999 Worldwide Most Commercial Lines
8,000 $9bn $30bn
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Nouveau Business Plan
Starting point:CIGNA - Combined >110%
Business Plan:1. Cease all businesses with Combined >100%.2. Reinsure Run-off liabilities
Ending point:ACE USA - Combined <100%
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ACE Transformation
Year Number of actuaries Photos
1994 1
1999 100
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Actuarial Value
Reserving
ROE
Planning
Monitoring
ROE
With specific deliverables to key
management
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Reserving
Establish sound reserving practices.
Have reviews completed timely.
Use a consistent reporting to Head Office.
Succinct reports for executive management.
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ROE
Revenue divided by Equity
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ROE
A measure to ensure effective use of capital.
Alternative views on ROE:– Calendar year ROE– Pricing ROE– ROE measure for multi-year tailored contracts– et al
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ROE
“Field of Dreams”
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ROE - E an Enigma
Capital needed in ACE– Market comparisons– DFA analysis– Statutory RBC models– Rating Agencies
Rating agencies– Each rating agency has different ways of assessing needed
capital:O RBC type model.O Various ratios and tests.O Comparison with other companies in common rating
category.
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ROE - E use S&P Model
Lower bound of needed capital.
Can get a copy from S&P.
Is a well defined model.
Can be built by the company.
Additive.
Is simple to use and easy to manage.
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ROE - method
Pricing ROE.
Run a cash flow model.
Use S&P capital.
ROE is IRR of Surplus flows.
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LiabilitiesUPRLoss RSVExpense RSVFunds Held
Equity
LiabilitiesUPRLoss RSVExpense RSVFunds Held
Equity
ROE Pricing ModelIRR on Equity Flows
Pool of Equity
Single Policy Venture Ltd.
IncomeUWInvestTaxes
IncomeUWInvestTaxes
AssetsInvestedReceivableRecoverable
AssetsInvestedReceivableRecoverable
Equity Flows
Premium Loss, Expense Income TaxInv Income
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ROE - GL example
Year Premium ExpensePaid
LossesEOY
reserveInv
IncomeSurplusFlows
0 100,000 (27,490) 0 70,000 2,048 (64,126)1 (6,617) 63,383 7,449 580222 (7,125) 56,258 4,161 4,2683 (10,256) 46,003 3,456 4,497…
1. Surplus amounts use S&P Capital Adequacy factors for premiums, reserves and assets. GL factors used here are: Premiums 1.5 x 0.33, Reserves 1.5 x 0.11, Assets 4.5%.2. ROE is IRR of surplus flows.
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Where are we now? PricingModelROE
Division 10% 12.5% 15% 17.5% 20%Bus. Unit 1 104% 102% 100% 99% 97%Bus. Unit 2 102% 99% 95% 92% 90%Bus. Unit 3 101% 97% 94% 90% 87%Bus. Unit 4 97% 94% 92% 90% 88%Bus. Unit 5 106% 104% 101% 98% 95%Bus. Unit 6 96% 92% 89% 86% 83%Bus. Unit 7 94% 91% 89% 86% 84%Bus. Unit 8 95% 93% 91% 89% 88%Bus. Unit 9 98% 96% 94% 92% 91%Grand Total 99% 96% 93% 91% 88%
Combined Ratio Needed to Achieve ROE
ROE
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ROE - Actuarial Value
Using ROE pricing models should result in achieving the ROE in the future.
Division managers will be given ROE targets.
Division managers will establish ROEs for products and business units within the division.
– Manager will set guidance for minimum acceptable ROE by product line.
– Some products deserve to achieve higher ROEs.– Some will always achieve a lot less.
Use ROEs as part of the planning process.
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Planning Cycle
CEO sets pricing ROE targets.
Planning process establishes strategies to achieve loss ratios, ROEs, and volumes.
Quarterly monitoring of planned strategies, and revision of loss ratios.
Use ROEs as guide in planning process.
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Planning CycleDetermine Pricing ROEs.
Present ROEs to CEOs, and Underwriters.
Develop alternative scenarios to achieve acceptable ROE for next year.
Manager/Underwriter agree ROE, Volume, plan loss ratios, and the
strategies to achieve plan loss ratios.
Underwriters work with actuaries to monitor and manage strategies. Eg
Pricing, risk selection, loss experience.
Results during the year.
Submit Plan with strategies
Verify achievements of Plan strategies
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Bridging Analysis
Business Segment 1
Combined Ratio
ROE
Hist. Indication 105.8% 8.0%
Action Steps:
Rate Change -6.0%
Treaty Renew . 2.5%
Elim. Bad Accts. -2.0%
Loss Control -2.0%
Final Plan Selection 98.3% 16.3%
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Bridging Analysis
Current Indicated Combined Ratio and ROE Combined Ratio @ Slctd. Run Rate : 105.8%
Selected Run Rate : 74.0% ROE @ Selected Run Rate : 8.0%
Loss Ratio Action Steps Impact Monitoring Tool/Frequency
1. Rate Change of 10% effective 1/1/02 6.0% Price Monitoring Reports/Monthly
2. Increase of +5% in Treaty Renewal Terms, 7/1/02 -2.5% Treaty Renewal Terms, 7/1/02
3. Non-Renew Accouts ABC, DEF, & GHI 2.0% Per Underwriter/Quarterly Updates
4. New Loss Control Initiative 2.0% Claim Freq Reports/Quarterly
7.5%
Selected Plan Loss Ratio : 66.5% Combined Ratio @ Selected Plan LR : 98.3%
ROE @ Selected Plan LR : 16.3%
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ROE planning process
Underwriter and actuary must work together to develop the plan ROEs.
– Actuary will develop projected loss ratios.– Underwriter will agree achievable price/contract terms/reinsurance
costs/new business strategies.– Actuary will reflect underwriters strategies into the ROE bridging analysis
to arrive at pricing ROE.
The process is dependent upon achieving agreed strategies. The strategies can be verified.
– Price monitoring– Underwriter culling activity.– Contract changes– Reinsurance changes
The planning process targets the CEOs primary ROE goal.– Deliverables are created– Actuary and underwriter are both responsible for the component
verifiable parts.