A Practical Guide to Commercial Insurance Pricing

Alina Pettifer and James Pettifer © Finity Consulting, The Warranty Group

This presentation has been prepared for the Actuaries Institute 2012 General Insurance Seminar.

The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions.

Agenda

Understanding Commercial Insurance

Translating Technical Analysis into Actionable Insights

Data and the Pricing Actuary

Adapting Pricing Techniques to Commercial Insurance

Corporate Segment

SME Segment

Intermediaries Insurance Products

Direct

Differences in Policy Wordings Business Pack Money section: Sum insured is increased by 50% for:

Wording A Wording B

From 60 days before Christmas Day to bank closing time on the first banking day thereafter, both days inclusive

• 8 weeks prior to and including Christmas day • 3 weeks after and including 26 December

From 30 days before Easter Sunday to bank closing time on the first banking day thereafter, both days inclusive

• 6 weeks prior to and including Easter Tuesday • 1 week after but not including Easter Tuesday

• 6 weeks prior to and including any celebrated event of a festive, religious or ethnic nature (other than Christmas or Easter

• 1 week after the same religious or ethnic event or celebration

Pricing Dynamics

Assessment of Profitability

Technical Pricing Assumptions

Product Strategy

Relationships

Market Cycle

Hard Market • Prices stop rising • Insurers making

excess profit

Soft Market Begins • New insurers enter

the market • Prices drop to retain

market share • Underwriting

standards drop

Soft Market • Investors become

nervous • Insurers make lower

than target returns

Hard Market Begins • Underwriting

standards improve • Premiums rise

sharply

Translating technical analysis into actionable insights

Engaging the portfolio manager

Transparency of analysis

Be Proactive

Why is data quality important?

What can an actuary do?

Data Cleansing

Use additional data

Data champion

Some Examples Text Mining

NCPD

Geospatial data

Customer data

ABS Statistics

Technical Pricing – Key Considerations

Very Large Losses

~35% Long Tail

Large number of unique industries

Corporate Insurance

• Setting the price of a policy based on its previous claims experience

Experience Rating

• Assessing the non-claim related costs • Providing a benchmark for the

expected claim costs

Pricing Adequacy Framework

• Impact of different reinsurance arrangements on the profitability distribution

Optimising Reinsurance

Summary To be effective in Commercial Insurance, an Actuary needs to:

Have an in-depth understanding of the Commercial portfolios, the market and the environment

Work in partnership with the Portfolio Manager

Have a detailed understanding of the data and its limitations

Adopt appropriate pricing methods which allow for the specific characteristics of each portfolio