1. Tools for the Soft Market Midwest Actuarial Forum September 23, 2004 Tom Duffy

2. 2 Companies Should Prepare Now For Market Changes Many Companies Have Enjoyed Benefits of Stronger Pricing Over Past Three Years Many Companies Have Enjoyed Benefits of Stronger Pricing Over Past Three Years Price Changes Have Masked Failures by Many Companies to Address Fundamental Operational Issues Price Changes Have Masked Failures by Many Companies to Address Fundamental Operational Issues Market Changes Will Test Companies in Meeting ROE Requirements Market Changes Will Test Companies in Meeting ROE Requirements Shareholders and Directors Will Hold Management to High Levels of Performance Shareholders and Directors Will Hold Management to High Levels of Performance

3. 3 Where Can Actuaries Make A Difference? Where Can Actuaries Make A Difference? Forecasting and Strategic Plans Forecasting and Strategic Plans Developing Appropriate Pricing Targets, Pricing and Pricing Tools Developing Appropriate Pricing Targets, Pricing and Pricing Tools Price Monitoring Price Monitoring Develop and Report on Leading Indicators of Trends in Loss Experience Develop and Report on Leading Indicators of Trends in Loss Experience Full Evaluation of Loss Experience Full Evaluation of Loss Experience

4. 4 Price Monitoring Different Approaches Different Approaches – Rates – Renewal to Expiring – Comparisons to Benchmarks (Manual rates & Mods) – Account by Account and Sampling

5. 5 Price Monitoring Importance of Price Monitoring Importance of Price Monitoring – Leading Indicator – Forecasting – Development of Rate Indications – External Reporting – Reserving (Importance often missed and not used)

6. 6 Price Monitoring Price Monitoring Systems Price Monitoring Systems – Rates Universal exposure base (e.g., PP Auto & WC) Universal exposure base (e.g., PP Auto & WC) Mix issues can distort Mix issues can distort Simple, if you have good exposure data Simple, if you have good exposure data TOP U/W’s will often have a good sense of the appropriate rate levels (e.g., Long Haul Trucks) TOP U/W’s will often have a good sense of the appropriate rate levels (e.g., Long Haul Trucks) – Renewal to Expiring Used in much of the public reporting Used in much of the public reporting Good exposure information important Good exposure information important Coverages/Limits/Attachment points Coverages/Limits/Attachment points

7. 7 Price Monitoring – New Business Monitoring Typical New Business 15% to 20% of Total Premium (varies by Segment) Typical New Business 15% to 20% of Total Premium (varies by Segment) –Soft Market Indicator > 25% or >> greater than historical levels Important to Monitor New Business Rate Levels to Renewals Important to Monitor New Business Rate Levels to Renewals –Soft Market -- New Business often with Price Levels 10% less than Renewals Good Pricing Benchmarks Critical to Monitor New Business Good Pricing Benchmarks Critical to Monitor New Business

8. 8 Price Monitoring – Comparison to Benchmarks Mods – Related to Benchmarks Mods – Related to Benchmarks –Experience/Schedule/IRPM/(a) rating, etc. Good benchmarking practices Good benchmarking practices –Often Industry Loss Costs adjusted for an Insurer’s Expense & Profit Loads Critical to Develop Benchmarks where None exist Critical to Develop Benchmarks where None exist Set Goals for Front Line Pricers Set Goals for Front Line Pricers

9. 9 Leading Indicators of Trends in Loss Experience Claim Frequency Ratios (Reported Counts to exposures or to premiums at common rate level) at Appropriate Level of Detail Claim Frequency Ratios (Reported Counts to exposures or to premiums at common rate level) at Appropriate Level of Detail Accident Quarter Reported Loss Ratios Accident Quarter Reported Loss Ratios – At quarterly evaluations – Little known after 3 months for casualty lines; 6 month evaluations are often tell tale directionally – Seasonality Issues – Noise vs. Real Trends

10. 10 Leading Indicators of Trends in Loss Experience Historical Reported Loss Ratios on Business Renewed vs. Non- Renewed Historical Reported Loss Ratios on Business Renewed vs. Non- Renewed New Business Reported Loss Ratios vs. Renewal Reported Loss Ratios New Business Reported Loss Ratios vs. Renewal Reported Loss Ratios New Business/Total Business Mix New Business/Total Business Mix

11. 11 Full Evaluation of Loss Experience Accident year/policy year profitability analysis, reserve reviews and rate indications Accident year/policy year profitability analysis, reserve reviews and rate indications To project current and prospective loss ratios we need a solid understanding of To project current and prospective loss ratios we need a solid understanding of – underwriting actions – price changes – non-price actions – claims handling actions

12. 12 SUMMARY Price Monitoring Critical Price Monitoring Critical – Good Exposures and Benchmarks Often Missing – New Business Lead Experience Indicators Lead Experience Indicators Forecasting and Reserving Need to Reflect Price Monitoring Forecasting and Reserving Need to Reflect Price Monitoring Plans should be Dynamic and Reflect What is Happening Plans should be Dynamic and Reflect What is Happening

13. 13 Tom Duffy, FCAS, CPCU, ARM Tom Duffy, FCAS, CPCU, ARM 55 W. Monroe, Chicago, Il. 55 W. Monroe, Chicago, Il. Tom.Duffy@milliman.com Tom.Duffy@milliman.com Tom.Duffy@milliman.com 312-499-5634 312-499-5634