CAS Ratemaking Seminar March 9-10, 2000 San Diego, CA FIN-31: International Rate-making Applications of DFA “Presenting DFA Results to the CEO” John Birkenhead FIA MAAA ASA Practice Head, P&C Consulting, Mercer London

Highlights Quick Recap on DFA How to effectively present DFA to the CEO or------

Highlights So you’ve done your DFA model You now have to present it to the CEO What can go wrong?

Recap on DFA DFA - The concept : - analysing the financial condition of an insurance enterprise DFA - The process : - testing scenarios and assessing the effect on the surplus DFA - The benefits : - better control of the company’s risk profile and surplus

Recap on DFA DFA - Possible results : - Inappropriate : pricing growth/business plans reserving/timing of surplus release re-insurance investments

The CEO These are all key fundamental issues But why might the CEO not be interested…? Or, put another way…...why might the CEO not be interested in what an actuary has to say…?

The CEO The CEO probably : is not an actuary sees actuaries as “back-office” number-crunchers is often being presented with requests for : more capital more staff etc. etc. So what can you do, as an actuary, to influence the CEO?

The CEO’s Agenda The CEO’s Agenda - “The 7 P’s”

The CEO’s Agenda The CEO’s Agenda - “The 7 P’s” Profitability

The CEO’s Agenda The CEO’s Agenda - “The 7 P’s” Profitability …maximised by the right combination of : Products (Design, Distribution)

The CEO’s Agenda The CEO’s Agenda - “The 7 P’s” Profitability …maximised by the right combination of : Products (Design, Distribution) People (Markets, Customers)

The CEO’s Agenda The CEO’s Agenda - “The 7 P’s” Profitability …maximised by the right combination of : Products (Design, Distribution) People (Markets, Customers) Prices (Rates)

The CEO’s Agenda The CEO’s Agenda - “The 7 P’s” Profitability …maximised by the right combination of : Products (Design, Distribution) People (Markets, Customers) Prices (Rates) People (Internal Staff)

The CEO’s Agenda The CEO’s Agenda - “The 7 P’s” Profitability …maximised by the right combination of : Products (Design, Distribution) People (Markets, Customers) Prices (Rates) People (Internal Staff) Processes (Underwriting, Reserving)

The CEO’s Agenda The CEO’s Agenda - “The 7 P’s” Profitability …maximised by the right combination of : Products (Design, Distribution) People (Markets, Customers) Prices (Rates) People (Internal Staff) Processes (Underwriting, Reserving) Platforms (Technology)

The CEO’s Agenda Profitability what, where and how? - what are the ‘profits’ e.g. reserve releases, expense margins, etc. - where will the profits be in future economic scenarios e.g. DFA models - how can the profits be maximised e.g. costs of changes vs benefits

The CEO’s Agenda Products (Design, Distribution) harmonisation of product design to distribution strategy - challenge whether the distribution channel is profitable - what are your competitors doing (internet, supermarkets etc.?) - dare to be different ? (e.g. new UK product design) monitor competitors’ product design - are their product designs (not their rates) more attractive?

The CEO’s Agenda People (Markets, Customers) challenge “status quo” in current market - don’t always follow the herd/try a ‘niche’ market learn from other countries’ experience - socio-economic data, retention methods (e.g. new UK product)

The CEO’s Agenda Prices (Rates) be pragmatic - there is always uncertainty over data, assumptions etc.. consider macro (“CEO”) as well as micro level issues (e.g. what are your competitors doing/what will their reaction be?) ‘consistency’ with reserves - explicit link to financial statements use simple, transparent rating structure - easy to manage and communicate..??

The CEO’s Agenda People (Internal Staff) recognise the CEO’s agenda (not just yours) : - understand and communicate the wider business and strategic implications recognise that the CEO may not be an actuary : - deliver well-reasoned ideas, not mathematical formulae recognise inter-disciplinary working : - non-actuaries (e.g. underwriters, accountants) are essential to deliver well- reasoned business propositions from DFA models

The CEO’s Agenda Processes (I) - Rate-making is not just about prices monitor the whole process chain, not just the financials : - be in control of : - underwriting referrals, acceptance ratios…etc. - claims handling (speeding up, backlogs, over-prudence) - be able to monitor efficiency improvements (Activity Based Costing - ABC) - banish departmental “turf wars” - share best practice (e.g. reserving and rating, underwriting and claims handling)

The CEO’s Agenda Processes (II) - Having a clear vision Have a clear vision of : - ideal future state vs. “quick wins” - resources needed vs. time to benefit Example : You ask your CEO to implement DFA models

The CEO’s Agenda Processes (II) - Implementing a DFA model Model #1 : “Ideal future state” : Complex, thorough model Many scenarios modelled All assumptions tested For all lines of business - Resources : 100 man-days + ??? - Time to benefit : 3 months + ???

The CEO’s Agenda Processes (II) - Implementing a DFA model Model #2 : “Quick win” : Simple model (to illustrate the principles) A few simple scenarios tested Lots of explicit (but reasonable) assumptions For one line of business only - Resources : 10 man-days + ? - Time to benefit : 1 month + ?

The CEO’s Agenda Processes (II) - Implementing a DFA model Model #1 vs. Model #2 “Ideal future state” vs “Quick win” 100 man-days vs 10 man-days 3 months to benefit vs 1 month to benefit “Your agenda” vs “The CEO’s agenda” Which of these models is the CEO more likely to approve?

The CEO’s Agenda Platforms (Technology - software and hardware) software : consistency of data - consistent data is important e.g. different data definitions!!! hardware : system upgrades/changes - emphasise that legacy data is important!! communication to the CEO : estimate the real $ cost of poor data e.g. “my DFA model includes a data deficiency/contingency/prudence reserve of $xyz million due to sparse data”

The CEO’s Agenda Recap on CEO issues - “The 7 P’s” Profitability …maximised by the right combination of : Products (Design, Distribution) People (Markets, Customers) Prices (Rates) People (Internal Staff) Processes (Underwriting, Reserving) Platforms (Technology)

How rate-making P&C actuaries can influence CEOs Make sure that you communicate clearly : - the source and sustainability of profits - the business process risks e.g. poor data quality... and the $ cost on reserves/rates - any implicit assumptions - they can’t be monitored/controlled easily - any inefficient processes - wasting time, effort and money - wider business issues (e.g. what the competition is doing/may do in response)

How ratemaking P&C actuaries can influence CEOs But most of all : Consider what the CEO needs to hear (“The 7 P’s”) Be pragmatic and commercially focussed - there is ALWAYS uncertainty in rates/reserves - there is never (usually) one correct answer

How ratemaking P&C actuaries can influence CEOs And finally : Be clear on “ideals” vs. “Quick Wins” (“Your agenda” vs. “The CEO’s Agenda”) - the CEO is more likely to want quick benefits, rather than resource-intensive long-term projects

The benefits The Benefits of Influencing the CEO Enhances the standing of actuaries in your company Enables your company to thrive and not just survive Enables our profession to thrive and not just survive

CAS Ratemaking Seminar March 9-10, 2000, San Diego, CA FIN-31: International Rate-making Applications of DFA “Presenting DFA Results to the CEO” John Birkenhead FIA MAAA ASA Practice Head, P&C Consulting, Mercer London Disclaimer : “The views in this paper are my own, and not necessarily shared by the co-sponsors of the program, nor my past or current clients nor my past or current employers.”