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Special Section sponsored by
SPARTA Acturial: The silent service surfaces
The prolonged soft market and the macro economic environment in which it has
endured have conspired to create tremendous challenges for growth and
profitability objectives in the property and casualty insurance industry. Ample
capacity, declining prior year reserve reservoirs, reduced exposure base, and
declining investment returns have helped demonstrate the relative health and
resiliency of the industry, but has also left it with little financial room to
run and compelled it to focus with greater intensity on underwriting results.
Industry executives, commentators and analysts have been widely uniform in
their assessment that “underwriting discipline” is paramount in the present climate. What is less clear is what underwriting
discipline really means in this context and whether or not it can be
quantified. Many would agree, however, that two of its important constituent
elements are pricing and reserving integrity.
Perhaps actuaries are the submariners of the insurance industry—below the surface, off the radar screen, probing depths that most dare not go,
and protecting it from dangers not readily observed. In a soft market, their
role in helping insurers stay true to fundamental pricing integrity is
critically important. Effective company actuaries set standards for consistent
risk evaluation so that variations from targets, whatever their cause or
source, can be quantified, documented and understood. The dynamics of the marketplace will naturally shift the contextual environment
in which underwriting decisions are made, placing constant emphasis on a
lodestar for effective pricing navigation. Qualitatively, this means a certain
philosophical grounding and organizational awareness. Quantitatively, it means
a modeling tool set that can flex to accommodate a wide range of insured
structures: deductibles, variable quota share, insured-selected aggregate stop
loss, coverage limits, and allocated loss adjustment expense treatment, to name
a few. The parameters, assumptions and conclusions derived from flexible
pricing models need to be transparent and connected to monitoring tools used to
measure performance against expectations. Even incorrect assumptions that are
monitored are not nearly as dangerous as those that are not.
Although answers to the hard questions in a soft market are not exclusively
found in the data, it’s obviously a very good place to start. The volume, detail and depth of the
historical data viewed against industry benchmarks help establish the pricing parameters of the evaluated risk and ground the assessment
of secondary and tertiary factors such as mix, operations and exposure growth
that may influence or even invalidate the credibility of initial pricing
indications. In the alternative, they may also reveal pockets of profitability
by state, line, class or premium size. A precise understanding of how the risk
will perform is the ultimate goal, and to the extent projections are either too
high or too low, they frustrate customer and company objectives to maintain the
appropriate levels of funding for insured exposures.
As actuaries develop and model performance expectations, they are simultaneously
creating the metrics against which they are measured. The more refined the
analysis and finer the slices of data, the greater the ability to detect
deviations from targets. As a new company operating on the latest technology
platform, SPARTA Insurance Company has had the advantage to develop a highly
integrated data set and series of reporting suites, metrics, flags and alerts
that provide a greater opportunity to identify performance deviation against
rate change, experience and schedule modification levels, claims, and loss
emergence. As the business matures, underwriting decisions with respect to
adjustments in appetite, structure, coverage and price can be made surgically.
If the actuaries do their part in preserving and monitoring price integrity,
reserving integrity should follow. Traditional reserve evaluation methods
aligned with detailed data and emergence patterns at line, state, class and
limit levels—when held against expected outcomes—should provide a clear picture of the risk assessed. Additionally, the
individual claim detail that populates multivariate models now more commonly
used in reserving should provide more accurate aggregate reserve estimates
earlier in the loss development process. More accurate reserves help create
more accurate prospective rate levels, and the circle continues. Ultimately,
the question of how an insurer responds to the challenges of the business cycle
is limited to the operational levers at its disposal and their influence on
financial results. It’s a daunting proposition in a prolonged soft market but one made less uncertain
by an awareness of what lies in the deep.
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