New York–Pricing actuaries face a number of tough challenges beyond sparring with underwriters over how much they can drop insurance rates when property-casualty markets turn soft, a veteran of the process said.

William Miller, senior vice president and actuary for ACE USA in Philadelphia, told colleagues attending a meeting of the Casualty Actuaries of Greater New York here last week that issues like eroding claims-handling standards and requests to set prices for newly launched coverages are among the many concerns that can cause headaches for actuaries as the market softens.

Often during a soft market some of the controls and processes around the claims function get eroded, Mr. Miller said. Insurers, he noted, may be more apt to allow the insured to self-administer their own claims or to have a say in the third-party administration selection–a situation less likely during a hard market.

“There are a lot of soft changes,” he said–changes that are difficult to quantify but which can have an impact on the loss ratio and on the profitability of the book being priced. Among some of the other changes that can affect profitability are changes in terms and conditions, program structure and reinsurance. Program structure changes, for example, may allow defense costs to erode deductibles or to apply outside policy limits.

While some changes in terms can be made with no price changes–like weaker pollution exclusions on liability policies or the removal of silica exclusions on umbrella policies–actuaries still need to quantify the impact in order to give their superiors an accurate read on how fast the market is changing and how such changes will impact their profitability, he said.

In addition, he continued, as insurers try to find new areas for profitable business, actuaries can be asked to price unique coverages and classes they really don't understand or have enough information about.

“When you start getting out of your comfort zone, look for help,” Mr. Miller said. “Let management know that there are some issues there.”

One of the first things that happens during a soft market, he said, is that the quality of information gets worse. During the hard market, actuaries were able to request explanations of why certain trends were emerging in the data. Now, “we may be expected to make a leap of faith” when data supplied is missing key information, he said. At the same time, actuaries are put under a lot of time pressure in a soft market, he said.

Advising the actuaries in attendance, many of whom had not worked through as many soft markets as Mr. Miller had seen during a career spanning nearly three decades, he said, “You need to speak up.”

Recalling the first soft market of his career, Mr. Miller said, “I sort of realized what was going on. Now that I have a lot more experience, I have a better perspective on how to speak up and what to speak up about,” saying he remained concerned about maintaining good relationships with managers while having to deliver messages they may not want to hear.

As the market softens, a key source of pressure for actuaries will be underwriters, Mr. Miller noted. Indeed, a good barometer of a soft market, he suggested, is the number of times underwriters come back to actuaries and ask them to revisit their pricing analyses.

Mr. Miller began his presentation with a top-10 list of the most common quotes he's heard from underwriters, kicking off the list with a request to reduce loss picks.

A typical underwriter's remark would be, “Brokers say that other carriers are coming in much lower. They must know something that you don't.”

Other quotes on the list illustrated requests to come up with rates to deliver prices on the same day the actuary received the loss data and attempts to give actuaries incomplete data, such as loss histories missing older years or data excluding large losses.

“If it wasn't for the large losses, this program would look great,'” was another quote.

Mr. Miller noted that while some quotes on his list sounded silly, there was “an element of truth in all” of them, including more subtle messages on the list suggesting that an actuary needs to “be a team player,” or that he or she has to stop coming up with high prices that will drive all the business away.

“Sometimes you have to show a lot of courage when you see things aren't being done right,” he said. While an actuary can end up alienating him or herself from key people for the short term, over the longer term “you end up developing a credible and excellent reputation,” he said.

Mr. Miller also advised actuaries to take pains to communicate and fully document their positions for underwriters, and to also demand that underwriters support their positions with facts and figures.

That “back and forth” is valuable, he said, urging the actuaries to remain openminded because underwriters may have a lot of experience and good judgment to share.

Special Reports /

Soft Market Increases Pressures On Actuaries

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