Ch6: Pricing Large Commercial Risks

• This chapter focuses on equipping actuaries with the knowledge required to provide advice on pricing large commercial risks.
• Pricing individual risks, like unique new buildings, often requires a different approach than pricing homogenous risks with lots of data.

Introduction to Large Commercial Risks

• Section 1 introduces what constitutes large commercial risks and discusses their characteristics.
• A key consideration is whether the risk can be priced at all, potentially due to insufficient expertise.

Understanding the Company Requesting Cover

• Section 3 emphasizes the importance of understanding the company requesting insurance cover, including the nature of their business.
• It's crucial to ensure the risk aligns with the insurance company's acceptance policy and underwriting guidelines.

Determining a Theoretical Price and Data Availability

• Sections 5-8 focus on developing a theoretical price for the requested cover, using various methods and obtaining data from other sources, even in the absence of past claims data.

Negotiation and Portfolio Management

• Section 9 highlights that the substantial premium will need a negotiation phase with the building owner.
• Section 10 covers ensuring the profitability of the entire portfolio, as monitoring profitability on a single new building is not meaningful due to the volatility of claims.

Defining a Large Risk

• "Large risks" are unique, requiring calculations tailored specifically to that risk, and the results from other risks or portfolios have limited use.
• These could include very large clients, such as an oil refinery.
• The definition also includes groups of risks insured collectively (schemes) and line slips.

Distinguishing Large Risks from SMEs

• Large risks do not refer to Small or Medium-sized Enterprises (SMEs).
• SMEs have insurance requirements, such as corner shops needing public liability cover and window cleaners needing employers' liability.
• Their premiums are based on standard rates adjusted for various risk factors, without individual review of each risk.

Characteristics of Large Risks

• The size of large risks can vary vastly, potentially up to billions in exposure.
• They differ in terms of occupation, construction, and susceptibility to natural disasters.
• Individually underwritten, allowing underwriters to dictate terms, conditions, and flexible pricing to fit the coverage needed.
• Consider a single-location retailer in Oslo with a total sum insured of £30 million, compared to an oil refinery of £10 billion in Indonesia, with varying natural catastrophe potential.

Challenges Posed by Larger Companies In Insurance

• Larger companies conduct multiple types of work in multiple locations.
• The amount the company can afford to spend on risk management increases, and the differences between good and bad risk management is more noticeable.
• Captives may also be used for self-insurance.
• Underwriters can spend more time looking at each risk because the level of each premium is higher.
• The level of cover and the conditions can change from renewal to renewal.
• Claims may be handled in-house or by a preferred claims handler.
• Contract features, such as aggregate deductibles, may lead to greater volatility.

Larger Companies and Premium Rates

• Larger companies doing many types of work should have higher premium rates due to more risks and heterogeneity.
• However, better risk management might reduce premium rates.
• A variety of locations may reduce accumulations of risk but at the same time add heterogeneity.
• Companies spending more on managing risk will attract lower premiums.
• Using captives will increase accumulation of risk, but may give easier access to data.
• Larger risks that can afford more scrutiny should be priced more accurately, resulting in a lower contingency margin and premium.

Adjustments to Premiums

• The premium will be higher if the terms are more generous or the sums insured increase.
• Claims handled externally should enjoy economies of scale and hence a lower premium, giving external handlers sufficient expertise.
• However, delegation of claims handling will also mean a possible loss of control, providing less data, hence a larger premium.
• Stochastic models may be used to quantify the expected outcome with aggregate or loss-sensitive features are present.

Schemes as Commercial Risks

• A scheme is a contract where the insurer insures a group of third parties agreed under the contract.
• The scheme is not one insured risk, but a group of insured risks that are priced collectively under one contract, and the risks are likely to be similar to one another.
• The similarity could be via a trade association or an affinity group.
• An affinity group is a group of individuals with something in common.
• Individual risks could all share a defined brand, sourced via the same intermediary.

Schemes and Pricing Approaches

• Schemes can exist for both personal and commercial lines.
• The nature of the scheme will affect the risk pricing.
• Some commercial schemes are priced similarly to a personal lines scheme with its level of the volume and availability of data.
• Credibility approaches, uses a motor fleet business, and puts weight on the fleet's past claims experience and the standard book rates.

Considering Specific Schemes

• A car dealership scheme, where policies are private motor insurance sold when the dealership sells new/used cars, has an affinity relationship.
• Mirror a book of private motor business and may be priced on a similar approach.
• Pseudo-large risks are schemes priced collectively with a set of rats that applies only to that group of risks.
• Local authority schemes, providing liability insurance, are likely to be priced using techniques later in this chapter because the volume and availability of data for the scheme is probably unsufficient.

Delegation in Schemes

• Most schemes involve an element of delegation, whether this could be claims handling, underwriting, sales or a combination of these.
• Less control over a part of the process means there's less control, and it has an effect on the function associated with the data.
• A managing general agent (MGA) is another form of delegation and is authorized to sell insurance on the insurer's behalf.
• Increasingly, MGAs, coverholders, and brokers seek out deals with insurers where the managing agent sells the policies and performs underwriting, policy and claims handling where the insurer provides capacity/capital and carries the risk.
• Special schemes are where there's some form of profit share, such as profit commissions, and MGAs can be shared across more than one insurer via a coinsurance arrangement.
• Coinsurance is common for large commercial risks because one insurer may not have sufficient risk appetite or capital to carry all the risk itself.

Line Slips Explained

• Various actions are put in place in order to pool similar risks and gain more premium volume, increased buying power, administrative, or other benefits.
• An agreement between the underwriters and the broker allows a lead underwriter to write and add risks on their behalf, and this is a line slip.
• The lead underwriter will take a significant share of the risk, that way, the following underwriters take smaller shares.

Underwriter Participation in Line Slips

• Follow underwriters want to know whether their decision to participate in the line slip is profitable.
• They also want technical advice on whether to continue participating in the coming year.
• Binding authorities operate on a contractual agreement that sets the scope of delegated authority, which would be allowing coverholders to enter into contracts, issuing documents on behalf of managers or other participants.

Features of Large Commercial Risks

• Dominate distribution of general insurance products used to be similar across, but has developed electronically for personal lines is now electronic trading and broker-based, creating an effect on distribution.
• Channels moved into direct distribution with certain types of smaller commercial risks following this pattern. Brokers are generally able to add value to buying insurange.

Different Distribution Channels

• Distribution channels for large are very different than sales because the channel can impact methodologies
• Secondly, by understanding the channels, it helps to understand market dynamics.

Insurance Markets Explained

• In the UK, there are various insurance markets in the companies market, the London Market, and Lloyd's.
• Large commercial risks are often traded in the London Market or Lloyd's.
• Understand the terminology used in these insurance markets, such as:
• Verticalisation: The case where different coinsurers have different terms/premium rates, and the leader terms are better than the followers. In a softer market, the difference turns out to be greater than in hard, and that's normal for aviation.
• Percent of whole: Percentage of the cost of the layer with 100% value and the whole risk.
• Percent of order: the percentage that reaches the market.
• If the leader underwriter is known and respected in the market, the potential follow underwriters are more interested in taking a share of the risk, where the follow writers will often quote for their risks instead of just accepting.
• Coinsurance: Where each writer takes a proportional share of the risk. An example, this is just the percentage that the coinsurer writes.

Unique Coverages and Negotiation

• Negotiation always happens on terms and conditions for individual risk.
• Tailor unique coverages are usually designed for the clients.

Operating Environment and Professionalism

• Actuaries in the UK have been involved in the pricing larger, complex risk.
• In insurance companies, their role is well understood by the management and underwriters.
• There is formality with the pricing review. For smaller sized, the technical role is assumed to be in a reasonable degree of accuracy.
• Following with the medium risk builds to the market rate when the the technical rate is there.
• Price flexibility isnt due to the technical rate being inaccurate, but it's due to factors.
• Some roles of actuaries involves calculating the minimum technical rate, acting as a second pair of eyes, assessing adequacy and auditing.
• They also help approve sign offs and authorize the process.
• Other involvements includes the underwriter advice, monitoring processes, allow control, and help negotiate with reinsurers.

What Actuarial Staff Should Be Familiar With

• There's confusion that actuaries can add value, and the actuary should know if they have the right attitude.
• There are also potential risks they should acknowledge like knowledge, experience, personality and support.
• They are usually direct with underwriters in pressure to achieve case prices.
• Must be confident to stand their ground and be appropriate, while making sure they're on the right track with agents, client risk managers and other departments.

Understanding the Client

• When pricing a large and risky risk.
• It's essential to take into account what the insurer is trying to sell, whether it's new or a renewal because it influences data.
• Helpful when being asked questions to understand the client and think with a questionable mind.
• Need to have debates, ask if there are any previous insurance or liability reasons, or other requirements.

Client Factors

• A client may require only a portion of the claims.
• For example, analyse insurance with the factors of anti selection and multinational programming.
• When pricing, it usually should reflect local differences and may include pro plaintiff judgements.
• The insurer can take costs on higher costs because the multinational is issuing local policies to maintain compliance.
• Consider quantity and quality of data, as well as currency.

Understanding Client Risks

• A company can alter with different mergers and acquisitions, meaning past experience isn't necessarily a guide to the future.
• Risk should be commensurate with the risk after the merger, and the merger can after the needed cover.
• Changes can affect risks can affect risks exposed, and processes that lead to what the client has to endure.
• Management has a good understanding on how to have an impact to lower premium.
• Check with the tighter risk management to ensure that assumptions were used based on the risk management.
• To help better indicate the kind of claims

Primary Risk Management Tools

• Reinsurance, underwriting, diversification, and financial engineering.

Claims Experiencing

• Question and fundamental concept when pricing and understanding commercial risk.

Risk Appetite and Structures

• Insurance companies are exposed to credit, operational, and insurance risks.
• These are regulated by the agencies and also require managing to keep the market safe across the operation.
• It's more common for insurance companies to have separated management, whether local or global to head the company by chief.
• As pricing actuaries, you should understand the appetite and structures, especially with issuing the policy for multinationals.

Underwriter Licensing

• Each should be able to write risks at the level you're sure you can afford.
• Should also write under accumulations and give scrutiny.
• Accumulations should be tested for limits and monitoring and control. There can be a loss across the entity.

Catastrophe Modelling

• Insurance companies purchase reinsurance up to this level.
• Develop software and market catastrophe, and must have enough limits and historic claims.
• PML could be the maximum loss to the geographical area.

Understanding the Current Coverage

• Large programs often require to look the limit and enhancements of small businesses, but the multinational raises the concerns of the coverage differences.

Coverage Examples

• Non standard and unique covers.

Property and Coverage Differences

• Local or national policy may be the most complex cover of the master will take most.
• Some like business interruption and high risks can be integrated.

Data Manipulation and Collection

• Main problems when pricing has a lack of data, it's important when in the business.
• The renewal should have the most data, but there can be past data that isn't available if what if was new to the insurer before?

Data Collection

• For the client if they're large enough of have to use a system such as a broker or agent.
• Or even a mix between a policy that sells, hand claim details between the people.
• There is the underlying to download, form of a management or what is used.

Type Of Data

• Potential rating factors including deductibles and sums.
• The underwriter wants to understand risks while looking for vessel vehicles, risks and accumulate.
• Claims are also looked at to know the data.

Terminology

• It's needed be to what terms have been used while working.
• The must have knowledge of what has been came across to see what to have as a baseline.
• As a note, when doing frequencies with not just those without.

Technical Rate Calculations

• There is no right or wrong set of methods.
• The two stages are to have that technical pricing was based on what is.
• There can be various additional terms and what to know is that they help with finance by insuring they provide it.

Terms of Policy

• Large may need have some features to look for and can effect the risks, for example when insuring for the long term, there may be break clauses if it causes experiences to be expensive.

Faculty and Insurance

• High risks and should be put for price, should know the contract from insurers and the methods used,
• The insurance and specific levels with with to consider what they have and all marginal cost. It comes together with income
• There is always capital invested which generates it, should build a appropriate premium and to create capital held