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The Underwriting Cycle Are Loss Reserves Reasonable in Light of Potential Underwriting Cycle Biases? December 2, 2011 PwC Actuarial and Insurance Management.

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Presentation on theme: "The Underwriting Cycle Are Loss Reserves Reasonable in Light of Potential Underwriting Cycle Biases? December 2, 2011 PwC Actuarial and Insurance Management."— Presentation transcript:

1 The Underwriting Cycle Are Loss Reserves Reasonable in Light of Potential Underwriting Cycle Biases? December 2, 2011 PwC Actuarial and Insurance Management Solutions (AIMS)

2 Slide 2 Agenda Introduction Pricing trends Inspection of reserve adequacy Implications on profitability

3 Introduction Slide 3

4 Slide 4 What is the underwriting cycle? Soft market Excessive capital Highly competitive Inadequate premiums Easing of terms & conditions Hard market Less capital available Less competition Better price adequacy Stricter terms & conditions

5 Slide 5 How does the underwriting cycle impact reserves? Pricing Bias Potential Reserving Bias

6 Slide 6 How does reserve adequacy impact pricing? Reserving Bias Potential Pricing Bias

7 Slide 7 Inherent link? Reserving Bias Pricing Bias

8 Pricing trends Slide 8

9 Slide 9 Pricing trends poll According to MarketScout’s “Market Barometer Report”, what is the average monthly composite P&C rate change for 2011? a)+5% or more – happy days are here again b)0% to +5% – rates are moderately up c)0% to -5% – rates are moderately down d)-5% or less – where is the bottom?

10 Slide 10 Industry average rate changes Source:

11 Slide 11 Industry average earned rate index Source:

12 Slide 12 Industry average earned rate index Source: hard market soft market

13 Inspection of reserve adequacy Slide 13

14 Slide 14 Reserve accuracy poll At year-end 2010, what percentage of US P&C insurance companies’ hindsight reserves from year-end 2004 were within -10% to +10% of their originally recorded value? a)73% – isn’t it called actuarial “science”? b)52% – but on the other hand, there’s loads of judgment c)37% – loads and loads of judgment d)12% – but at least it can’t be negative

15 Slide 15 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million Source: SNL, 2010

16 Slide 16 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $500 million Source: SNL, 2010

17 Slide 17 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million, ex 2000 & prior Source: SNL, 2010

18 Slide 18 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $500 million, ex 2000 & prior Source: SNL, 2010

19 Slide 19 Percentage of companies with 2010 hindsight reserves within 10% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million – by line of business Source: SNL, 2010

20 Slide 20 Calendar year-end hindsight (redundancy)/deficiency Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010

21 Slide 21 Accident year hindsight (redundancy)/deficiency Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010

22 Slide 22 Accident year and calendar year hindsight emergence Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010

23 Implications on profitability Slide 23

24 Slide 24 The current market Lengthy soft market Potentially inadequate rates on recent accident years Possible optimistic pricing & reserving 5 consecutive years of reserve take-downs Calendar year operating results propped up by prior year releases Releases mask accident year profitability issues Erosion of reserve redundancies Weak macro-economic environment Low investment income

25 Slide 25 What drives the move from a soft to hard market? According to the III, need the confluence of 4 criteria 1.Sustained period of large underwriting losses 2.Material decline in surplus/capacity 3.Tight reinsurance market 4.Renewed underwriting & pricing discipline

26 Slide 26 Prospective implications of underwriting cycle Is trouble ahead? Several consecutive years of inadequate rates Reserve redundancies used up? Low investment returns Market reactions before turn? M&A Coverage modifications

27 Slide 27 PwC Actuarial & Insurance Management Solutions Scott Cederburg, FCAS, MAAA (678)

28 © 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Thank you


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