Sinners & Saints

Bill McConnell (The Lloyd’s Actuary)

&

James McPherson (A Lloyd’s Actuary)

Objective

•Improve Lloyd’s by our actions next year

How?

• Look at and discuss what we did well and badly

• Individual action plan to do it better

Sinners?

• Equitas + Actuaries = Lloyd’s is saved?

• High Salaries + New Lloyd’s Problems = ?

• We must deliver !

Where are the Saints?

Ideal time spent?

• Reserving

• Input to price

• Management decisions

• Opportunity spotting

• Profitability measurements

• Strategic projects

• Other projects

Ideal time spent?

• Reserving 10%

• Input to price 35%

• Management decisions 5%

• Opportunity spotting 20%

• Performance measurements 10%

• Strategic projects 10%

• Other projects 10%

What Value Do You Bring to Lloyd’s?

How have Actuaries performed ?

Summary Movements CRTF

YOAUlt Prem

MovementUlt Claim

Movement

Ult Claim Mvtless Ult Prem

Mvt

% Ult ClaimMvt less UltPrem Mvt

1995 - 2,143 3,300 5,443 7%

1996 - 25,354 93,002 118,356 25%

1997 102,981 191,032 88,051 14%

1998 313,315 458,265 144,950 17%

Total 388,799 745,599 356,800 18%

Summary Movements SLTF

YOAUlt Prem

MovementUlt Claim

Movement

Ult Claim Mvtless Ult Prem

Mvt

% Ult ClaimMvt less UltPrem Mvt

1995 -10,943 30,028 40,971 21%

1996 -24,896 -15,001 9,895 2%

1997 -25,248 123,665 148,913 20%

1998 346,467 353,765 7,298 1%

Total 286,343 492,585 207,077 10%

Summary of Global Movements

YOAUlt Prem

MovementUlt Claim

Movement

Ult Claim Mvtless Ult Prem

Mvt

% Ult ClaimMvt less UltPrem Mvt

1993 126,212 28,888 -97,324 -14%

1994 125,085 -2,747 -127,832 -14%

1995 206,372 114,805 -91,567 -6%

1996 187,992 259,450 71,459 3%

1997 229,599 688,520 458,921 12%

1998 413,546 1,480,048 1,066,501 30%

Total 1,288,805 2,568,963 1,280,158 10%

Gross Ultimate Loss Ratios

YOA ULR @ 12/99 ULR @ 12/98

1993 59% 60%

1994 63% 64%

1995 69% 69%

1996 87% 85%

1997 104% 97%

1998 121% 106%

1999 109%

Explanations of Movements U.S.

YOA Most Common Explanations

1995 Property - including Georges, Med Maland General Liability

1996 Med Mal, PI and D&O (no. of claims),Errors in returns and SL worse than US$

1997 PI, D&O, Bankers Bond, Med Mal, andProperty (Georges)

1998 Property (Georges + others), Med Mal,PI and D&O and Energy

Explanations of Movements Global

YOA Most Common Explanations1993 Adjustments to PI reserves and allocation

anomalies between parallels.

1994 Adjustments to Marine liability andallocation anomalies between parallels.

1995 Med Mal, PI, GL and anomalies betweenparallels

1996 Med Mal, Energy, PI and D&O, andanomalies between parallels

1997 PI, D&O, Bankers Bond, Med Mal, anddistortions caused by External RITC

1998 Aviation, Property (Georges + others),Med Mal, PI, D&O and Energy

Distribution of Catastrophe Claims

0

200

400

600

800

1000

1200

1400

1600

1800

1995 1996 1997 1998 1999 2000

200019991998199719961995

Movement in Catastrophe incurred Claims

£000s

YOA 31-Dec-98 Sept 2000 MovementL/R

Movement

1995 673,472 789,719 116,248 1.6%

1996 427,843 545,470 117,628 1.9%

1997 432,227 655,107 222,880 3.4%

1998 655,799 1,609,733 953,934 13.6%

Movement on Catastrophes

£m YOA Dec-98 Dec-99 Sep-00

EuroStorms

1998 - 3

1999 - 309

Georges 1996 1 2 3

1997 60 81 98

1998 306 482 566

Initial Expected Loss Ratios

As At 1995 1996 1997 1998 1999

Dec 1998 90% 105% 120% 100%

Dec 1999 89% 105% 122% 135% 100%

Forecast of Results

-1200

-1000

-800

-600

-400

-200

0

200

400

600

800

12 18 24 30 36

1996199719981999

Other Points

• Claims Inflation.

• How many syndicates should an actuary be appointed to?

• Actuarial reports.

Actuaries Roles

Best Practice?

Consultant Actuary Syndicate

Actuary

Underwriter

Managing Agency Board

Indicated Reserve

Syndicate Reserve

Lloyd’s + Corporate oversight

Consultants still signing

• In-House 11%

• Consultants 89%

• In the future?

Roles

• Managing Agency - Final say

• Underwriter / In-house actuaries propose

• Consultant gives independent benchmark + check for comfort (+ sign off?)

Do you do your bit?

• Get enough information?

• Improve the reserves / reserving process?

• Interpret the results better?

• Give better feedback on exercise?

• CUT THE TIME TAKEN ?

Practical Reinsurance Guide

Must do gross of reinsurance and then net down

Reinsurance + bad debt is the biggest issue for next year

It is not that hard – each year separately

• Quota Share - adjusted gross ULR (PC etc)

• XL - tricky bit (unless Cat protection only) reinstatements

• Stop loss – Read slip carefully (additional premiums, non renewal clauses)

• Financial – talk with auditors

Likely issues

• Bad debt – including delays

• Reinsurance exhaustion (all “working” layers? – check slips)

• Much less protection for next year

• More expensive for next year

• Hence more finite arrangements?

Good rating index

• At Policy level

• Compared to unbiased / objective measure such as rating model

• Easy to use (no more than 2 inputs per policy)

Suggestions – 1 – in use

• Change in premium cash terms %

• Change in non cash terms %

Suggestions – 2 – not in use

• Expected ULR used in pricing

• Change in exposure due to change in terms % change in ult exp claims

Very useful

• Target changes

• initial expected ultimate loss ratios

• Pricing

• Improving models (quality control cycle)

• Planning

• Corporate backers will need it.

Why don’t we do this?Ult premiums 1999 £50m

Renewal percentage 80%

Change in terms non cash 3%

Change in terms cash 5%

New Business £10m

Ult premiums 2000 £52m*

mmm 52£10£%8005.150£ *

Or this?

Ultimate loss ratio 1999 120%

Premium Rate change 8%

Claim inflation 5%

Initial loss ratio 116.7%*

%7.11608.1

05.1%120

*

This calculation is

• Easy

• Verifiable

• Done in most non-Lloyd’s contexts

• Rarely done in Lloyd’s !

Do all of Lloyd’s example

If time (more than 10 minutes to go)

James improvement list

• All Gross to Net

• Write up clear Initial Ultimate Expected Loss Ratios for all main classes (Never Underwriters figure unless documented)

• Allocation by Lloyd’s risk code

• Benchmark against market stats

• Reinsurance costs

• Early warning (US Trust Funds)

Bill’s suggestion

• All Gross to Net

• Write up clear Initial Ultimate Expected Loss Ratios for all main classes (Never Underwriters figure unless documented)

• Allocation by Lloyd’s risk code

• Benchmark against market stats

• Reinsurance costs

• Early warning (US Trust Funds)

Your Improvement List ?