Ratemaking and Product Management · © Zurich - Commercial Markets, August 2008 2 Antitrust Notice...

© Zurich - © Zurich - 1 Commercial Markets, August 2008

Ratemaking and Product Management

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Joel Appelbaum Zurich Financial Services Programs and Direct Markets Underwriting Transformation February 2010


Antitrust Notice

•  The Casualty Actuarial Society is committed to adhering strictly to the letter and spirit of the antitrust laws. Seminars conducted under the auspices of the CAS are designed solely to provide a forum for the expression of various points of view on topics described in the programs or agendas for such meetings.

•  Under no circumstances shall CAS seminars be used as a means for competing companies or firms to reach any understanding – expressed or implied – that restricts competition or in any way impairs the ability of members to exercise independent business judgment regarding matters affecting competition.

•  It is the responsibility of all seminar participants to be aware of antitrust regulations, to prevent any written or verbal discussions that appear to violate these laws, and to adhere in every respect to the CAS antitrust compliance policy.


Agenda

•  About Zurich •  Industry Trends •  Objective vs. Subjective Underwriting Criteria •  Model Feedback •  Lessons Learned •  Example of Decision Scorecard and Rules


Zurich

•  Global footprint -  Five continents -  170+ countries

•  3rd largest commercial insurer •  27 straight Quarters of profitability


Where is the Industry Going?

“Leading companies are doing more than just collecting and storing information in large quantities. They’re now building their competitive strategies around data-driven insights that are, in turn, generating impressive business results. Their secret weapon? Analytics: sophisticated quantitative and statistical analysis and predictive modeling supported by data-savvy senior leaders and powerful information technology.”

“Leading companies are now building their competitive strategies around data-driven insights that are, in turn, generating impressive business results. Their secret weapon? Analytics: quantitative, statistical analysis and predictive modeling supported by data-savvy senior leaders and powerful information technology.”

From Thomas H. Davenport and Jeanne G. Harris: Competing on Analytics: The New Science of Winning


What is the Value Proposition related to Predictive Analytics?

§  Design risk based pricing structure §  Focus retention effort on profitable risks §  Identify potential premium leakage

§  Implement straight through processing §  Optimize audit procedures, loss control, service offerings §  Enhance our ability to detect fraud

§  Focus sales on profitable niches §  Target new business §  Identify highly profitable agencies

§  Reduce application information collection §  Increase our Cross-selling / Product Density

Loss Ratio Improvement

Expense Reduction

Profitable Growth

Value Drivers: Implementation Methods:

Customer Centricity

The challenge associated with optimizing the acceptance and integration of these new modeling techniques into a sound underwriting process is creating a consistent decision-making framework.


Predictive Modeling—Why Now? The use of Predictive Modeling is becoming widespread in the

Insurance Industry. Failure to act will result in adverse selection!

Source: Towers and Perrin Survey 11-18-2009

© Zurich - © Zurich - 8 Commercial Markets, August 2008 Commercial Lines Predictive Modeling, Thomas R. Bayley, Emphasis magazine

Commercial Insurance – Frequency vs. Severity


Objective vs. Subjective Criteria

Objective •  Credit Score •  Years in Business •  Loss History

Subjective •  Safety Culture •  Management Style •  “Marquee” Customer


Average Complete Market Cycle lasts 5-10 Years

* Rate Response Triggers

1) ISO Rate changes and/or 2) Annual pricing projections

0 1 2 3 4 5 6 7 8 9 10

Market Softening

Average soft market lasts 2 – 6 years

Market Hardening

Average hard market lasts 3 – 4 years

Typical Duration of Rate Response = 21+ Months

(17%-35% of the market cycle)

Filing Process

6 Months

Premium change

15 Months *Trigger

N Months

Commercial Insurance Market Cycles


Potential for Adverse Development

64.5%65.0%

66.0%

67.0%

64.0%

0%

25%

50%

75%

100%

125%

Keep a

ll

Lose

best

5%

Lose

best

15%

Lose

best

25%

Vary R

etenti

on

Scenario Description

Dec

ile R

eten

tion*

62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

Proj

ecte

d Lo

ss R

atio

Best 30%Middle 50%Worst 20%Projected LR

Commercial Insurance - Avoiding Adverse Selection


Renewal Price Change & Loss Ratio (Retail)

5.20%4.10%3.90%

6.10%4.50%4.60%

9.20%7.30%

6.40%

30.08%

29.80%30.50%30.00% 30.44%29.90%

35.30% 32.30%

35.20%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Q1 Q2 Q3

Month

Pri

ce C

han

ge

& L

R

Best 3 RPC

Avg 5 RPC

W orst 2 RPC

Best 3 LR

Avg 5 LR

W orst 2 LR

Line of Business Countrywide—Pricing & Loss Ratio by Decile Bands


Line of Business Countrywide— Retention Results by Decile Bands

Retention (Retail)

76.00% 75.10%77.00%

74.50%71.80% 70.85%

65.60%63.40% 62.10%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Q1 Q2 Q3

Month

Ret

enti

on P

erce

nta

ge

Best 3

Avg 5

W orst 2


Data

Expect challenges in data gathering and cleansing!


Data

-  Cleansing / reconciling bad data elements is time consuming

-  Multiple data sources required

-  Commercial lines -  Regulation -  Legacy systems

-  Data Stewardship – savvy leadership on what the data means


IT Impact Predictive tools often bump into legacy systems which can be costly


Keep it Simple! Reducing the “Noise”


The Last Mile

“…the most important activity for the leadership team is to keep analytical initiatives on track and to monitor outcomes to ensure

that anticipated benefits are achieved.” Competing on Analytics, Thomas Davenport, Harvard School of Business, 2007.


Underwriting Actions

Under-priced

Significant Rate

Increase

Great

Potential Credit

Moderate

Potential Debit

Good

Renew

Risk


Start off Simple…

Displays policy and modeling results for selected renewal policy -Primary tool for Underwriters -Displays detailed data -Drop downs for policy search -Basic policy data -Premium and loss data -D&B data -Company, Exp and Schedule mod -PM Indication -Reason Code Indications -Notes field for UW comments

99912345 Matt Scott Landscaping

American Underwriters

Acme Insurance Acme Insurance

Ratemaking and Product Management · © Zurich - Commercial Markets, August 2008 2 Antitrust Notice...

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Transcript of Ratemaking and Product Management · © Zurich - Commercial Markets, August 2008 2 Antitrust Notice...