2007 CAS Ratemaking 2007 CAS Ratemaking SeminarSeminar

Mark Lyons Keynote AddressMark Lyons Keynote Address

Support SlidesSupport Slides

Market Cycle Management: Blunt & Straightforward

Unless otherwise noted, slides have been sourced by the presenter

Passion

Intuition

Courage

Credibility

PICC Your Battles

In 2005, Robert Hartwig asked this group:In 2005, Robert Hartwig asked this group:Who’s to Blame for Problem Pricing?Who’s to Blame for Problem Pricing?

1.1. ActuariesActuaries

2.2. Senior Management of CompanySenior Management of Company

3.3. Your Underwriting DepartmentYour Underwriting Department

4.4. Your Marketing DepartmentYour Marketing Department

5.5. RegulatorsRegulators

POGO: “We have met the enemy and he is us.”POGO: “We have met the enemy and he is us.”

Peak Peak

Crunch

Profit*

ExpansionCompetitive Phase

Soft Market

ContractionRe-underwriting Phase

Hard Market

So

ft Har

d

*Includes Investment Income

POSITIVE

NEGATIVE

‘83 ’84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ’98 ’99 ’00 ’01 ’02 ’03

Insurance Cycle TerminologyInsurance Cycle Terminology

Thomas Stamm, NAPSLO Collegiate Symposium, April 1, 2006

-10%

-5%

0%

5%

10%

15%

20%

25%

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00

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F2

00

7F

20

08

F2

00

9F

20

10

F

Note: Shaded areas denote hard market periodsA.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by NWP GrowthStrength of Recent Hard Markets by NWP Growth[2006 to 2010 figures are Insurance Information Institute forecasts][2006 to 2010 figures are Insurance Information Institute forecasts]

1975-78 1984-87 2001-04

2005: biggest real drop in premium since early 1980s

Current $

Real $

Better View than Calendar Year Combined Ratios or Operating Income

Many Sub-Cycles Occurring within ONE Underwriting Cycle

0255075

100125150175200225250275300

Year

Com

bine

d R

atio

Product A Product B

Different cycle lengths, different rates of improvement and deterioration

Some lines are heavily correlated; others only slightly

Impact of the Insurance Cycle onImpact of the Insurance Cycle onTransaction Variables and UnderwritingTransaction Variables and Underwriting

Soft MarketSoft Market Information Information ↓↓ Coverage Coverage ↑↑ Pricing Pricing ↓↓ Attachment Points Attachment Points ↓↓ Capacity/Limits Capacity/Limits ↑↑

Underwriting Underwriting ↓↓

Hard MarketHard Market Information Information ↑↑ Coverage Coverage ↓↓ Pricing Pricing ↑↑ Attachment Points Attachment Points ↑↑ Capacity/Limits Capacity/Limits ↓↓

Underwriting Underwriting ↑↑

The Complexity of ComparisonThe Complexity of ComparisonInsurers Differ Strategically on their Approach towards:Insurers Differ Strategically on their Approach towards:

Target MarketsTarget Markets Distribution ChannelsDistribution Channels Cross-sell leverageCross-sell leverage Diversification strategyDiversification strategy Rating agencies and regulatorsRating agencies and regulators Market share versus Margins PhilosophyMarket share versus Margins Philosophy Incentive CompensationIncentive Compensation Cost structuresCost structures Use of reinsurance/capital marketsUse of reinsurance/capital markets Capital management strategyCapital management strategy Wall Street; quarterly versus longer-termWall Street; quarterly versus longer-term Shareholder expectationsShareholder expectations Other variablesOther variables

1 – Companies continue to sort out what ERM means

2 – SEC questions reserve ranges/variability

3 – Continued pressure on audit firms for more critical review of actuarial work

4 – P/C Cat models continue to evolve

5 – Use of predictive modeling spreads to smaller personal lines carriers & small commercial lines

6 – Casualty softening market continues

7 – Finite reinsurance probes continue

8 – Risk transfer initiatives: bifurcation not likely to pass

9 – Federal judge rules that flood exclusions do not apply to 2005 levee breaks

10 – Hard market for property cat risks driven by changes in pricing models and capital requirements creates alternative capacity (cat bonds; side cars)

1 - Back end

2 - Back end

3 - Back end

4 - Both

5 - Both; mostly internal

6 - Front end

7 - Back end

8 - Back end

9 - Front end (full circle); partial impact though

10 - Both; mostly internal

Top Ten Casualty Actuarial Stories of 2006 (per February 2007 Actuarial Review)

Executive Assurance “Proxy” Other Liability Claims MadeExecutive Assurance “Proxy” Other Liability Claims MadeCombined Ratios and ROECombined Ratios and ROE

OLCM Accident Year Combined Ratio and ROE, 1990-2005

020406080

100120140160

Accident Year

Com

bine

d R

atio

-15%-10%-5%0%5%10%15%20%25%30%

Eco

nom

ic R

OE

Combined Ratios - OLCM Economic ROE

Source: Industry Annual Statements, Schedule P and Bernstein Research, August 2006

Tillinghast Industry Price/Limits Perspective

0

200

400

600

800

1000

1200

1400

1600

1800

Tillinghast Price Index Tillinghast Limits Index

Tillinghast Annual Price/Limit Indices – D&OTillinghast Annual Price/Limit Indices – D&O

Tillinghast Implied Price Per Million Changes –D&OTillinghast Implied Price Per Million Changes –D&O

Tillinghast Industry Price Per Million Changes

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

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60.0%19

87

1988

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2005

Price Per Million CHANGES

Marketplace: EA Competitor ResultsMarketplace: EA Competitor Results

COMPETITOR BOOKED GROSS RESULTS @12/31/2005

25.0%

50.0%

75.0%

100.0%

125.0%

150.0%

175.0%

200.0%

225.0%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Accident Year

Lo

ss

/LA

E R

ati

o

Source: Competitor Group 2005 Annual Statements – Schedule P

Marketplace: 6 EA Competitor SummaryMarketplace: 6 EA Competitor Summary

6 Competitor Viewpoints

0%

20%

40%

60%80%

100%

120%

140%

160%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Accident Year

AVG LR Standard Deviation CV (Coefficient of Variation)

•Underwriting DOES matter

•NONE of above Competitors would have made a 15% ROE from 1999 – 2002!

•Redefine “SUCCESS”

Passion

Intuition

Courage

Credibility

PICC Your Battles

* * Make decisions! Make a difference! Be counted on to be a Make decisions! Make a difference! Be counted on to be a valuable contributor!valuable contributor!

* * Variability is extremely important but you need to be in the Variability is extremely important but you need to be in the shoes of the underwriter; align with time pressures; wide ranges shoes of the underwriter; align with time pressures; wide ranges provide little valueprovide little value

* Follow up with UW to see what happened to the quote – show * Follow up with UW to see what happened to the quote – show you care, are part of the team & deserve to be notifiedyou care, are part of the team & deserve to be notified

* Meet w/UW managers & supervisors to get a better “feel” and * Meet w/UW managers & supervisors to get a better “feel” and varying perspectivesvarying perspectives

Examples of Business Value Added:

PASSION, INTUITION, COURAGE and CREDIBILITY

Transaction & LOB Actuaries

* * Read actual policy files – stay late – learning doesn’t stop when the Read actual policy files – stay late – learning doesn’t stop when the exams are completedexams are completed

* * Insist on a full underwriting submission – NOT JUST LOSS Insist on a full underwriting submission – NOT JUST LOSS EXPERIENCEEXPERIENCE

* Don’t get “brokered” by an underwriter as to the information * Don’t get “brokered” by an underwriter as to the information suppliedsupplied

* Know what stage of the Underwriting Cycle this Profit Center is in* Know what stage of the Underwriting Cycle this Profit Center is in

* Be “Universal Translators” (for the Star Trek fans in the audience)* Be “Universal Translators” (for the Star Trek fans in the audience)

Transaction & LOB Actuaries (Continued)

* Insist that your actuaries develop critical business skills

* Minimize “not my job” syndrome

* Consider putting your staff physically with UW units

*Get involved in Risk Management endeavors

* Where appropriate set up cross views by Business Division and Product within Actuarial

*Reserving Actuaries need to meet with UW as well; don’t shut them off and only have Pricing Actuaries communicate

Actuarial Managers/Actuarial Executives

*Adopt effective Meeting Management behaviors that support cycle management

* Managers need to provide referral points and escalation points to their actuarial staff no different than underwriting units do

* It’s important to begin soft market management at the transaction level; being flexible on marginal deals and being strong and forceful on unprofitable deals. Your line actuaries need to know that they have your support if and when this is escalated over their heads to you.

* Don’t become solely the “Premium Prevention Unit”

Actuarial Managers/Actuarial Executives (Continued)

Actuarial Executives/Chief Actuaries

•Stand up and be counted – THIS IS MOSTLY A PROMOTION TRANSITION ISSUE – You are the final stop. The buck stops here!

•Need to maintain professional distance

•Important to identify with management rather than your employees; you ARE management

•Seek out Business Unit executives who themselves are (were) actuaries

* One key objective of the Chief Actuary in a soft market should be to become UNPOPULAR

Actuarial Executives/Chief Actuaries (Continued)

* Need to alert Senior Management, quantitatively, just how profitable and unprofitable the subject lines of business have been historically over all points of the Cycle

138.6

117.6

108.5112.3

104.5

110.5

122.6 124.4

111.8114.4

112.1

95 96 97 98 99 00 01 02 03 04 05

Other Liability - Combined RatiosOther Liability - Combined Ratios

Average Combined Ratio 1995-2005 = 116.1

A.M. Best; Insurance Information Institute

Marketplace: Casualty Competitor ResultsMarketplace: Casualty Competitor Results[as of December 31, 2005][as of December 31, 2005]

Competitor Occurrence Casualty Gross LR Results

40%

60%

80%

100%

120%

140%

160%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Accident Year

Lo

ss/L

AE

Ratio

AIG Chubb Zurich ACE

XL St Paul/Travelers Hartford Fireman's Fund

•The cycle will swing back

•Insurers’ results will deteriorate

•Underwriting makes a difference

Paradoxes:

•All companies have the “best underwriters in the industry”

•All companies are “better than average”

Source: Competitor Group 2005 Annual Statements – Schedule P

Excess Liability Market CapacityExcess Liability Market Capacity[in Billions][in Billions]

$1.570$1.540

$1.425$1.575

$1.710

$2.045$1.941

$2.011

$1.721

$1.405$1.334

$1.432

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Capacity dropped 30% from 2000 to 2003 but has since increased by 10.2%

2005 Limits of Liability Report, Marsh, Inc.

Marketplace: XS Casualty IndustryMarketplace: XS Casualty IndustryHistorical “Known” Loss/ALAE RatiosHistorical “Known” Loss/ALAE Ratios

West Large'Coast Large Surplus Surplus

Capacity West Stock Lines LinesPolicy XS Coast XS & Umb XS & Umb Buffer XSYear Carrier MGU Book Book Book

1973 310.7% 256.3%1974 254.9% 221.7% 146.6%1975 53.8% 101.8% 61.1%1976 39.1% 76.2% 85.1% 50.2%1977 23.6% 63.9% 35.6% 20.0% 35.9%1978 28.5% 67.6% 23.8% 16.2% 32.1%1979 42.1% 121.6% 28.9% 35.5% 53.7%1980 58.5% 175.7% 103.2% 106.0% 69.4%1981 63.0% 233.9% 104.8% 49.6% 119.2%1982 86.0% 270.9% 195.2% 31.8% 174.6%1983 89.6% 321.0% 67.7% 140.1%1984 68.2% 249.2% 28.4% 118.0%1985 6.8% 31.0% 0.9% 44.4%1986 9.6% 5.1% 23.0%1987 25.7%1988 31.9%1989 30.1%1990 16.7%

Valuation @12/1989 @12/1989 @12/1986 @12/1984 @6/1991

M

A

R

K

E

T

C

Y

C

L

E

Arch, November 2, 2006

Hard Market

Hard Market

Actuarial Executives/Chief Actuaries (Continued)

* Set up a clear basis with Senior Management (of which YOU are a part) as to how the business will be routinely viewed

•Set up a clear set of analytics with Senior Management that leverages this data organization basis

[LEADING INDICATORS]

Actuarial Executives/Chief Actuaries (Continued)

LEADING INDICATORS

oRisk Selection - Hit Ratios

oPrice Monitors

oRenewal Retention

oCommission Rates

oNew / Renewal Business Mix

oAdmitted / Non-Admitted Mix

oLoss Trends

oTerms and Conditions

oChanges in Portfolio Mix

oReturns of the Business

oUpdate Returns Quarterly RETROSPECTIVELY AND PROSPECTIVELY FOR THE NEXT ROLLING TWO POLICY YEARS. Communicate graphically!

Leading Indicators: Risk Selection

* Hit Ratios

Need to be viewed as a time series & best if done on a Policy Quarter basis (not Calendar Quarter)

Also meshes with other Leading Indicator’s data organization

Critical to be done separately for New versus Renewal Business

Renewal business should have higher hit ratios

>New business, in a softening market, will be where most deterioration lives

>New business will be “bought” either by price, T&C, expanded capacity, lower attachment points, expanded services, higher commissions

Critical since most carriers measure renewal rate change only – underwriters know this & drive new business knowing that the measurements are delayed until first renewal – masks true state

Leading Indicators: Risk Selection (Continued)* Quoted to Submitted – “triage”, risk appetite validation, % deemed attractive enough to quote; can be indicative of changing risk selection standards, changing marketplace messages, better producer management efforts

* Bound to Quoted – success rate given that it was quoted; can show changing pressures in the marketplace

* Bound to Submitted – the product of the above two; ultimate measure of success-to-activity; can be a masked result similar to a pure premium trend versus that of frequency and severity separately

* Sheer volumes of submission, quote, binder

Staffing models

Verification of Risk Appetite messages to marketplace

Been largely ignored by actuaries – too simplistic?

Leading Indicators: Price Monitors

Needs to be a continually updated time series

Need for Renewal business and New business for all material sectors of the book

Renewal business (from basic to sophisticated)

→Average Policy Premium

→Price Per Million (PPM)

→Price per unit of exposure

→Effective Rate Change

Exposure, policy term, limits, attachment/deductibles, layer %

Coverage mix changes, endorsement grants, defense costs

→Acknowledgement that some products cannot be accurately measured

→Compare “apples to apples” with “normalized” and explain any differences

→Know how much of the renewal book the monitors represent

→Consider giving field underwriters online tools so they can more effectively choose between alternatives AND not get disadvantaged by

brokers asking for multiple quote options

Important to have multiple measures both internally and externally produced (these are Renewal oriented)

→CIAB – view of the producers via survey

→Tillinghast – view of the carriers via defined survey

→Advisen / RIMS – view of the customers via survey

→Marketscout – view of a producer aggregator via data and survey

Know their gathering and sampling approaches

Reconcile external indications with internal indications

Use as probe with underwriting units

Leading Indicators: Price Monitors (Continued)

Leading Indicators: Price Monitors (Continued)

New Business (from basic to sophisticated)

→Expiring pricing/terms are suspect and not easily verified or subject to audit

→Price per unit of exposure

→PPM→New business relative to Renewal business in defined clusters

Establish benchmarks from bureau information, company manual rates, loss rating indications, credibility weighted – theoretically sound but practically difficult

Need to maintain BOTH premium change monitors & effective rate change monitors

MarketScout Commercial Price ReportMarketScout Commercial Price Report

www.MarketScout.com

Average Premium Trend by Line of BusinessAverage Premium Trend by Line of Business

www.MarketScout.comwww.MarketScout.com

Average Commercial Rate Change by Line - CIABAverage Commercial Rate Change by Line - CIAB

Commercial accounts trended downward from early 2004 to mid-2005 though that trend

moderated post-Katrina

Council of Insurance Agents & Brokers

Marketplace: CIAB D&O Insights (EA)Marketplace: CIAB D&O Insights (EA)

Leading Indicators: Renewal Retention

→Key component of ongoing profitability

More familiarity with renewal accounts

Cheaper to secure since most effort expended on gaining the account originally as New Business

→Should be viewed on both a Renewal Premium basis and a Renewal Count basis

→Be mindful of the “Count” mechanism; policy or Account based; policy retention can drop with Account retention staying flat due to changing layers or # policies per Account; consistency is the key

→Further retention views by “Renewal Loss Ratio” can help in ascertaining whether the Renewal LR will be lower than the New Business LR

→Can aid in commission strategy as softening market puts pressure on commissions

Leading Indicators: New /Renewal Mix→Fundamental that New Business and Renewal business should conceptually have the same Ultimate Loss Ratios (ULR) at ONLY the apex or nadir of that product’s cycle

Softening Markets – New Business should have higher LRs than renewals

Hardening Markets – New Business should have lower LRs than renewals

→Knowing the New/Renewal mix is critical for profitability, reserving, and operating action

→Can aid in determining strategy beyond “continuing to hit Plan” or overall grow/shrink decisions

→Helps with relative mixture of New / Renewal growth or de-celeration year-by-year SEPARATELY for new versus renewal

→Demonstrated metrics and management here also permits more flexible and creative reinsurance arrangements

INSURANCE OPERATIONS – Market Cycle INSURANCE OPERATIONS – Market Cycle ManagementManagement

15%

25%

35%

5%

(5%)

Slow Writings

Minimize New Business Writings

Increase Writings

Focus on Best of Renewals; need at least

minimal market presence

Graph projections driven by estimated rate changes, loss cost trends, other “leading indicators”

70%

80%

90%

110%

COMBINED

RATIO

100%

Policy Years

N

P

V

or

R

O

E

Graph of Economic Return by Policy Year (and Policy Quarter)

MaximizeWritings

MaximizeWritings

oCommission Rates

Can be used within an overall economic review or can be integrated as part of the price monitor process; either way is fine as long as consistency is maintained and definitions are clear

Reflects the changing impact of the net true “cash received” perspective

Producers attempt to increase commission rates at the worst possible time for insurers in order to keep THEIR top line growth flat

Insurers then feel the double whammy of lower prices & increased “net” of producers

On the other side, Ceded side, pay attention to whether facultative cessions are being bound and coded net of ceding commission – big effect on ceded LRs

Leading Indicators: Commissions

oAdmitted/Non-Admitted Mix

Comes down to who is responsible for collecting and submitting associated taxes

→Admitted – needs to be charged within the quoted premium and remitted to authorities by insurer

→Non-Admitted – is not charged within quoted premium and is collected and remitted to authorities by the Surplus Lines broker

Generally speaking, this is about a 3% rate cut, all else being equal, when renewing from a non-admitted basis to an admitted basis

Leading Indicators: Admitted/Non-Admitted

Leading Indicators: Loss Trends

Frequency

Severity

Pure Premium

Reconcile internal versus external data indications

Primary versus Leveraged Excess Trend

Important to communicate the incremental “ground” that is being lost each quarter

Again, can be included as part of the effective rate change or instead be within an overall economic analysis

I prefer loss trend to be OUTSIDE the effective rate change calculation; this is more straightforward to communicate to Underwriting rather than being clouded/obfuscated by loss trend

Industry Pricing and Loss Trends @ 12/31/2006Sources: CIAB Pricing Surveys, ISO, NCCI

2004Q12004Q22004Q32004Q42005Q12005Q22005Q32005Q42006Q12006Q22006Q32006Q4Grand TotalLOB

Percentage of Producers RespondingQuarter2001Q32001Q42002Q12002Q22002Q32002Q42003Q1

Commercial Auto - Primary

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

20

01

Q3

20

01

Q4

20

02

Q1

20

02

Q2

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EEffective Date of Policy

Pri

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Loss Trend (Freq & Severity) Pricing Changes

Umbrella

-10.0%

0.0%

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30.0%

40.0%

50.0%

60.0%

20

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Q3

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Effective Date of Policy

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Loss Trend (Freq & Severity) Pricing Changes

Workers' Compensation

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

20

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Q3

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Effective Date of Policy

Pri

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Loss Trend (Freq & Severity) Pricing Changes

Commercial Property - Primary

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

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Q3

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Effective Date of Policy

Pri

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Loss Trend (Freq & Severity) Pricing Changes

Leading Indicators: Change in Portfolio Mix

* Can indicate where your Business Units are having increased success and having trouble

* It’s our & management’s job to determine whether we should “push down the gas accelerator” on some LOBs and “hit the brakes” on others

* Reductions in some LOBs may be more a function of services (Claims, premium audit issues, deductible issues, collateral issues, risk engineering issues) and may not necessarily imply a market below Return thresholds

* Forces another review of whether the emerging mix of business meeting economic and strategic objectives

* Can alter your view of net retentions, reinsurance programs, upfront capacity usage, attachment points, and the extent of services rendered

Leading Indicators: Returns of the Business

NPV Margin – % present value ‘profit/loss’ of present value premiums

ROE – same as NPV but related to allocated equity and includes interest income from equity

ROC – same as ROE but related to all capital allocated (eqty, debt, hybid)

All three can co-exist but one needs to govern→Best done on an UW Year or Policy Year basis (i.e. “Decision Year”); cleanest implementation and communication approach→Accident Year can’t DIRECTLY relate to UW action

Call for all insurer’s measures to reflect risk-free interest rates ONLY to stall any desires for cash flow underwriting (even capped rates if Treasuries go uncharacteristically high due to inflation)

Leading Indicators: Returns of the Business

Senior Executive decision-making and communication can be separate from communication necessary for line-of-sight execution

→Demand sophisticated Senior Management views for broad decision-making

→Demand simpler Product Line and Region/Office goals, standards, and thresholds

Speak in clear traditional “line of sight” language; rate change, premium change, loss ratio, combined ratio

Leading Indicators: Returns of the Business (continued)

Extend the return measures reasonably into the future by Policy QTR

→Let’s you see WHEN established return thresholds may be pierced; creates another measure for meetings and action – TIME

→Update these reviews quarterly as Leading Indicator information & marketplace dynamics are clearer; make expense, reinsurance and capital management assumptions

Company X - Return on Capital Forecast by Underwriting Year

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2005 2006 2007 2008

Division 1 Division 2 Division 3 Division 4 Division 5 Division 6 Division 7 Total Company

Discussion of Priority Order of Individual Risk Softening Market Impacts

1st - Risk Selection

2nd - Terms and Conditions

3rd - Attachment Points and Capacity Usage

4th – Price

What??? Have you lost your mind???

Measure each:

Risk Selection – we’ve discussed – 1st above

Pricing – we’ve discussed – 4th above

Attachment Points & Capacity Usage – next slide

Terms and Conditions – next slide

Can be others

Attachment Points/Capacity (Limits) – we’ve only implicitly discussed these within the effective rate change calculation

Needs a quarterly portfolio monitoring

→Shifts of capacity upward can get “lost” if only reflected within effective rate change calculations

→The appearance of effective rate change trade-offs when higher limits are provided is where the ILF curves are weakest (i.e. bigger blocks at higher attachment points)

→Allows explicit questions to be put to underwriting executives

→Important to know if XOL treaties are being utilized as intended

→Underwriters often drop attachment points to ensure that their premium goals are met (i.e. “close your eyes and pray for miracles”)

→If the measurement is for deductibles rather than attachment points, a measure of portfolio credit risk needs to be made as well

Discussion of Priority Order of Individual Risk Softening Market Impacts (Continued)

Terms and Conditions – this represent coverage changes whether granted by form or endorsement; extremely hard to measure

Recommend isolating KEY coverage areas and monitoring frequency of useCan be accomplished via sampling, automated binder issuance or policy issuance systems, reinsurer audit reportsParticipate on Corporate UW audits and/or read their reports

Need to involve the Claims department and develop approximate Loss Ratio impacts of these key coverage grants or retractionsSome measure should be included even if a SWAG – no mere clarifying footnote will overcome the lack of inclusion of form deterioration in projected LRs

Discussion of Priority Order of Individual Risk Softening Market Impacts (Continued)

Market Cycle Responsibilities of Senior/Executive Management

Clear communication of WHAT CONSTITUTES SUCCESS

Repeatedly communicate to the Company at large the importance of Cycle Management and that of Margins over Top Line Revenue

Make Market Cycle Management a key component of UW Executive Performance Objectives

Align Incentive Compensation directly with Underwriting return measures

Corporately highlight and encourage both ends of the spectrum: Home Run Deals AND “Golden Glove” plays; must be true to the culture and behavior desired

Market Cycle Responsibilities of Senior/Executive Management

Demonstrate action and not just words; communicate this alignment

Make the difficult decisions that we’re paid to make

Look for new markets, new methods of distribution, and new innovative products

Develop tools for both seasoned and young underwriters to manage the Cycle

Influence the structure of Board Committees

Additional Feedback Loops about the Market Cycle

Scheduled Business Reviews / Profitability Reviews of all major UW units

Business Unit UW Audits

Corporate UW Audits

Changes in UW Authority Delegation or UW referral thresholds

Internal Audit Reports

Claims Audits / TPA Audits

Claims Large Loss & Cause of Loss MeetingsTrade magazines and studies

Reinsurer Audit Reports

Reinsurance Market approach to treaty renewals and facultative support

Requested changes to UW aspects of IT systems

Frequency of binder “halts” on approved u/w authority

Risk Management Reports

Monthly Executive Reports and Calls

oProfit Center ExecutivesoRegional Executives

QUANTITATIVE INPUTS

Hit Ratios – Selectivity measures Distribution churn Price & Rate Monitors: PPM or Per Exposure – Absolute measures Renewal Change – Relative measures

Loss Trend – minimal rate change needed to stay even Renewal Retentions – business & channel continuity

measure Mix: New vs. Renewal – additional profitability

measure since new business generally has lower pricing or T&C

External Industry Pricing Benchmarks Booked Competitor Results +/- Reserve

Announcements Audits: U/W, Financial, Internal Audit, Reinsurers Claims Department meetings on Severity & Frequency Risk Management Concentration Reviews

QUALITATIVE INPUTS Business Division anecdotes Marketplace dynamics Competitor observations Terms/Conditions appraisals Broker feedback

commission actions anecdotes

Reinsurer feedback audits anecdotes

Claims audits / TPA audits Historical cyclicality of Product line Assessment of U/W talent to industry average Supply & Demand; market dislocation

opportunities

OUTPUT: MANAGEMENT ACTIONS Growth or Contraction of Product

Premium margins Commission strategy Mix of business Capital allocation ROE Net retention strategy Internal structure changes if necessary

REINSURANCE MARKETPLACE INPUTS Availability of Q/S and XOL capacity generally Degree of support for Arch products specifically Terms and Conditions imposed Intermediary feedback Booked Reinsurer Results +/- Reserve Announcements Desired net position given the above

Arch Insurance Group Softening Market Strategic Decision Process

Quarterly Monitoring & Business Review/Profitability Meeting Topics

Other Career Options for Actuaries

*Actuaries are fundamentally qualified for many functions within an insurance enterprise BUT learning never stops

Caution:

*May only see the 1/9th of the iceberg above the water

*Underwriters are sometimes accused of having just enough understanding of actuarial principles to be dangerous --- we don’t want to be accused of the same thing

•Can be difficult to break into these other areas without either a Management Rotational Program or a mentor who helps guide you there

Other Career Options for Actuaries (Continued)

•Recommend collectively sitting down with your boss, H/R, and the “target” functional executive to plot a course towards achieving your goals; may involve additional coursework and/or shifting from your current “comfort zone”; perhaps some units would accept a “transitioning”

•You CAN make it work

•It may involve a “reality check”. For example, while you were passing exams, underwriting staff with the same years of experience you possess have been accumulating significant experience, trial-by-error knowledge, and possess many business contacts that are critical and difficult to amass quickly. Expect to Pay Your Dues!

* Innovation / Alternative Markets / Capital Markets

* Chief Financial Officer

* Chief Information Officer

* Chief Underwriting Officer

* Chief Ceded Reinsurance Officer

* Enterprise Risk Management Officer

* Chief Risk Officer

* Business Unit Executive

* Chief Operating Officer

* President and/or Chief Executive Officer

Other Career Options for Actuaries (Continued)

Passion

Intuition

Courage

Credibility

PICC Your Battles