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Bringing The Carrier- Intermediary Relationship Into The Twenty First Century. by Russell Devitt MSc FCCA FCII

Achieved Pricing, the Business Plan and Implications for Business Operations...or do you know when to walk? by John Murray FCII

The Planned Feedback Loop - An Indispensable Management Tool. by John Murray FCII

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Observations were taken using historic data and the dynamics of pricing, costs and Insurance Operating Return to test the rate of return at different levels of pricing. This provided measures that allowed the client to determine a pricing floor. This process was designed to be integrated within the standard pricing techniques employed.

During the analysis, one point that was illustrated to the client was that although the desired end result is to optimise return on capital, focusing directly on this measure can be dysfunctional. Instead it can be better to use a measure which, provided that the capital density does not change, remains the same irrespective of movements in expense ratios or the level of allocated investment income.

A key concept that helped bring the idea alive for the company was a banking analogy. Across the cycle, there will be years when the return achieved is above the required long term target return, and a technique was developed to facilitate smoothing of earningsover a defined cycle period. . It should be stressed, for completeness that there are other, equally valid, walk away point measures.

Critical to the success of the project was the active involvement of the Underwriter. This was necessary to secure the Underwriter’s faith in the approach adopted so that there was the confidence to make the hard walk away decisions that the process mandates.

Previously, the Underwriter had focused solely on the loss ratio. The project has made it clear that the Insurance Operating Return, and hence the return on capital achieved, is dependent on all the items that make up the insurance return loop, such as expense levels and cash-flow. As a result, the Underwriter now has a holistic approach instead of just looking at pure loss ratios

Outcomes

The project successfully produced a fully understood methodology, appropriate to the line of business, capable of producing a pricing floor for the Underwriter and the Underwriter’s team.

In addition, it provided the ability to identify, for management purposes, infractions of the parameters produced by its application. Not only is this information valuable for Underwriters, but it will be required by relevant businesses to comply with Lloyds Circular Y3318.

After the project was completed, the client’s CEO said; “This work has had real added value for us. We now have a good understanding of what walk away pricing really means, plus we have a methodology that we can extend to other areas.”

“This is a great example of how a consultancy project should work. There has been real knowledge transfer to us from the consultants. We can now leverage our investment in this project by rolling the methodology to other lines of business.”

Key issues

Achieving target long term rates of return on capital depends upon having a methodology for determining walk-away prices.

Developing such a methodology requires the active involvement of the Underwriter if it is to be employed in practice.

Underwriters need to focus on more than the loss ratio and include all of the aspects of the insurance return loop.

Tracking the outturn over the years of a cycle,and constant monitoring of actual and expected pricing strength, is a key part of the approach.

Pure loss ratio is not always the most effective measure for ensuring that target long term rates of return are achieved.

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