Presentation is loading. Please wait.

Presentation is loading. Please wait.

CYCLES IN CASUALTY: Balancing Loops in the Insurance Industry Kawika Pierson MIT Sloan PhD Candidate.

Similar presentations


Presentation on theme: "CYCLES IN CASUALTY: Balancing Loops in the Insurance Industry Kawika Pierson MIT Sloan PhD Candidate."— Presentation transcript:

1 CYCLES IN CASUALTY: Balancing Loops in the Insurance Industry Kawika Pierson MIT Sloan PhD Candidate

2 P RESENTATION O UTLINE The Insurance Industry Past Research Economics Control Theory System Dynamics The Model Boundary Causal Loop Diagram Important Structures PID Control Behavior How You Can Help

3 T HE I NSURANCE I NDUSTRY Basic Idea Two Sides to the Business Insurance Investing Insurance Cycle – What is Cycling? Underwriting Loss Ratio or Combined Loss Ratio Loss Ratio – Adjustments/Premiums Expense Ratio – Expenses/Premiums Combined Ratio – Loss + Expense = (A + E) / P

4 A V IEW TO A C YCLE

5

6 T HE I NSURANCE I NDUSTRY Insurance Cycle – What Causes It? Industry View: The next stage is precipitated by a catastrophe or similar significant loss, for example Hurricane Andrew or the attacks on the World Trade Center. – The Insurance Cycle wikipediaHurricane AndrewWorld Trade Center Academic View: Using quarterly data from 1974 through 1990, we provide evidence of a long-run link between the general economy and the underwriting performance as measured by the combined ratio. – Grace and Hotchkiss, 1995 J o Risk and Insurance Fluctuations in the supply of property-liability insurance may be exacerbated by regulation. Winter, 1991 Economic Inquiry

7 P AST R ESEARCH IN E CONOMICS Early 1980s through Mid 90s Three Main Schools of Thought Cycle Caused by Interest Rate Fluctuations Doherty and Kang (1988) – Insurance Prices Change in Lagged Response to Interest Rates Grace and Hotchkiss (1995) – External Impacts on the Property-Liability Insurance Cycle Cycle Caused by Limits to the Supply of Insurance Winter (1988, 1991, 1994), Gron (1989, 1994) Cycle Caused by Feedback Processes Brockett and Witt (1982) – Loss expectations from the past inform current premiums, causing autocorrelation

8 P AST R ESEARCH IN C ONTROL T HEORY If a Cycle Exists we Will Create a Lagged Negative Feedback Loop to Explain It Balzer and Benjamin 1980 – Dynamic Response of Insurance Systems with Delayed Profit/Loss Sharing Feedback… Journal of the Institute of Actuaries Zimbidis and Haberman 2001 – The Combined Effect of Delay and Feedback on the Insurance Pricing Process: a Control Theory Approach Insurance: Mathematics and Economics

9 P AST R ESEARCH IN S YSTEM D YNAMICS The Claims Game and Hanover Insurance claims management, quality and costs Quality = Claim Adjustment Quality Daniel H. Kim Learning Laboratories Peter Senge – The Fifth Discipline Moissis 1989 Masters Thesis (Sterman) Focuses on Determining Decision Rules Cavaleri and Sterman (1997) Towards evaluation of systems thinking interventions: a case study Improved Managers Mental Models

10 P AST R ESEARCH IN S YSTEM D YNAMICS Insurance Cycle… Are There Really no SD Articles on the Insurance Cycle? Thomas Beck Co-President of Swiss SD Society Works for Large Swiss Reinsurer No Published Articles on Insurance Cycle

11 T HE M ODEL – B OUNDARY Endogenous Variables Premiums Underwriting Quality (Risk) Claims Employees Administrative Costs Exogenous Variables Desired Profit Margin Size of the Total Market Some Components of Administrative Costs

12 T HE M ODEL – B OUNDARY Many Feedbacks Excluded Size of the Insurance Market Investments and Interest Rates Free Capitals Influence on Underwriting Effect of Time Pressure on Claim Settlement Competitive Effects on Profit Margins Random Claim Incidence Employee Productivity Is this Too Far Towards Negative Loop w/ Delay

13 THE MODEL – CASUAL(TY) LOOP DIAGRAM

14 T HE M ODEL – S TRUCTURES

15

16

17

18

19

20

21 T HE M ODEL – PID C ONTROL Translating Equations to SD isnt Always Easy Proportional Control = Standard Structure Integral Control = No Steady State Error Reasonable that People Use IC Derivative Control = Less Overshoot Less Likely that People Use DC

22 THE MODEL – PID CONTROL

23

24

25

26 T HE M ODEL – B EHAVIOR Displays Decaying Oscillation to Step Input

27 THE MODEL – CASUAL(TY) LOOP DIAGRAM

28 T HE M ODEL – B EHAVIOR Instability A Function of Largest Source of Costs

29 THE MODEL – CASUAL(TY) LOOP DIAGRAM

30 T HE M ODEL – B EHAVIOR Loop Gain Very Important

31 T HE M ODEL – P OTENTIAL S OLUTIONS Derivative Control of Premiums? Careful Tuning Is Necessary Managerial Implementation Industry Wide Application Why Do Quality Standards Change? Can This Loop Be Cut Life Insurance The Kalmanuclear Option? Optimal LINEAR Filter Just Build a Really Good Model Instead


Download ppt "CYCLES IN CASUALTY: Balancing Loops in the Insurance Industry Kawika Pierson MIT Sloan PhD Candidate."

Similar presentations


Ads by Google