Chapter 10. Pricing Large Commercial Risks
Large Risk - very unique
Very large clients (eg. oil refinery, in the billions) - individually underwritten, using unique characteristics, involves negotiations
Multiple types of work to consider
Large premium, therefore lots of time to underwrite
Wordings and Sums Insured are down to egotiation
Claims can be handled by the large company, or an external claims handler
Company specific things, like culture and risk mgmt
Schemes - insure a group of 3rd parties agreed under the contract (affinity group or trade assoc.)
Some homogeneity - example, a motor insurance scheme through a dealership - not large!
Where it is motor fleet - priced as one risk (pseudo large)
Low volume and poor data
Delegate claims handling, UW or sales (like a UMA)
Usually co-insured for large commercial risk
Line Slips - delegate authority to sell insurance
A few UW provide delegation to a lead and bind under them
Typical Features:
Insurance Markets - only large insurers, heavily reinsured
Verticalisation - different terms between lead and follow (large differences in soft) depends on strength of the lead
Per cent of Whole = percent of share of risk
Per cent of Order = percent of share that reaches available market (eg. 50% may go to Lloyd's, 50% to SA, so 10% of Whole is 20% of Order)
Distribution - still broker, but following towards more direct (Broker - bancassurance - direct - internet)
Affects remuneration, market dynamics and business pressure
Unique Cover and Negotiation
Negotiate wording and price, almost always
Operating Environment and Professionalism
New environment for the Actuary
Role of Actuary:
Second Pair of Eyes
Minimum Technical Rate
Negotiate with 3rd parties (RI)
Advise underwriters
Audit
Sign-off Pricing
Rate monitoring and design systems
Relevan Data
Accumulation Control
Assist Process
Important to understand our role, and for mgmt to agree, and understand where we are out of our depth
Knowledge, experience, personality and support sructure
Direct contact with Underwriters
Pressure to agree technical rates, and ask for more
Confident to stand our ground
Contact with:
Agent/Broker
Client risk manager
Internal Finance
Internal UW and Negotiators
Claims Dept
Senior Mgmt
Understand the Client -
Discuss with UW, client and Broker
New business or moving, why are they moving?
Why do they need cover? (Size of company, volatility)
Multinational, cover in different territories? (High cost of local knowledge, laws, diversified)
Change of client over time? (M&A's, culture change, strategy, process)
Level of risk mgmt, security? (WH&S, audits)
Similar to another risk we have?
Risk Appetite and Control:
Is the risk a good fit for us?
Understand our risk appetite (both size, type and concentration)
Put in place control structures -
Underwriter Guidelines (size and exposure)
Accumulation Monitoring (modelling, PML's, other methods) - can treaty RI, limit capacity, increase price for scarcity
Understand Covers:
Non-standard
Unique
Extra Covers (versus smal risks)
Differing deductible for different risks
Example - Difference in Covers/Limits (DIC/DIL)
where cover is different for different regions (flood, nat cat exposed)
Data Collection & Manipulation:
Source of Data - client, broker or agent or the insurer
Format & Frequency - Raw, processed, mgmt info (board pack) or bordereau, on request, monthly or quarterly (or less)
Types of Data - Policy (some rating factors, sum insureds and deductibles, number sold, premium written, total sum insured), Claims (list of claims, payments made, outstanding, or aggregated, development triangle, list of large losses at agreed threshold) - push for complete data, talk to claims handlers for info.
Survey reports, client's website and annual reports and getting info from broker
Terminology - understand the data you get, ask questions, earned or written premium, gross or net (RI or commission), IBNR claims, ground up or above excess, exchange rate for currency, gross or net, are nil claims included, understand claims basis (loss occurring, etc.)
Technical Rates:
Understand risk, T's & C's, price based on data available, communicate with parts of the business
Understand the Cashflows
Premium: May be a profit share if claims are good, may be a min or max premium, then adjusted for risk exposure, may be linked to claims
Term of policy: Usually longer than 12 months with special features, possible breakout clauses
Facultative RI: Exceed our risk appetite, build in RI cost
Expenses: Must meet promises made to client in terms of service (eg. claims team)
Commission: Sometimes a flat fee, consider profit comm
Cost of Capital and Investment Income: understand who benefits from investment income, for long tail and LT this income can be substantial
Technical Method - same as always, estimate probable cashflows and discount, allowing for possible large losses (eg. 1 in 50), can use RI for this effect
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Burning Cost - consider credibility, past experience, future exposure, allow for large losses, inflation, unequal policy periods
Frequency/Average Size - same as burning cost but split by frequency and size
Simulation - same as above, but gives us simulated outcomes, fit distributions to claims
Market Models (Exposure Rated) - price market as a whole, then look at our risk based on measures of exposure and risk
Negotiation:
Explain to Underwriter
Transparency - help client and UW to understand price
Product Design - either to adjust price, or match the product the client wants
Data Capture - technical price and final price, keep info on discussions
Portfolio Issues:
Monitor overall portfolio
Expected performance of UW years
Capital required
Renewal increases, performance of new business versus exisiting
Technical versus actual premium
Compare to similar portfolios in the market