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PricewaterhouseCoopers LLP P w C
Professional Indemnity Forum 2006PI market - an actuary's view13 July 2006
PricewaterhouseCoopers LLP
Agenda/Contents
PricingUnderwriting cyclePI market environment
Slide 3PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Insufficient pricing for risk?UK market loss ratio has followed a typical ‘cycle’ pattern
80%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1996 1997 1998 1999 2000 2001 2002 2003
UK Gross ULR Average
Source: 2004 FSA return data
Pricing
Slide 4PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
How to price insurance business
Premiumrate
Cost Value to client
Competition / substitution
Pricing
Slide 5PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Start with the gross premium
0
20
40
60
80
100
120
Premium
When pricing, what goes wrong?
Slide 6PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
When pricing, what goes wrong?
Average non event year - ULR 68%
0
20
40
60
80
100
120
Premium Non-Event
68%
68%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1996 1997 1998 1999 2000 2001 2002 2003
UK Gross ULR Average
Source: 2004 FSA return data
Slide 7PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Large claims loading of 12%?
0
20
40
60
80
100
120
Premium Non event Large
68%
12% ?
80%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1996 1997 1998 1999 2000 2001 2002 2003
UK Gross ULR Average
When pricing, what goes wrong?
Source: 2004 FSA return data
Slide 8PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
What allowance is made for larger event years?
0
20
40
60
80
100
120
Premium Non event Large Cat
68%
12% ??
When pricing, what goes wrong?
Slide 9PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Assume commission is 15% of gross premium
0
20
40
60
80
100
120
Premium Non event Large Cat Commission
68%
12% ??
15%
When pricing, what goes wrong?
Slide 10PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Assume management expenses are 10%
0
20
40
60
80
100
120
140
Premium Non event Large Cat Commission Expenses
68%
12% ??
15%
10%
When pricing, what goes wrong?
Slide 11PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Payment pattern implies investment income is 15% of premium (at 5% return)
Typical paid development pattern
0%20%40%60%80%
100%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43
Quarter
Typical paid development pattern
68%
0
20
40
60
80
100
120
140
Premium Non event Large Cat Commission Expenses Investmentincome
68%
12% ??
15%
10% 15%
When pricing, what goes wrong?
Source: 2003 FSA return data
Slide 12PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Return on capital influencing pricing
Pricing
Assuming;• Minimum capital charge for liability business is 14% • Required return on capital is 15% • Risk free rate is 5%
⇒ Profit margin required is 11%
⇒ ULR is 79%
⇒ Large loss + Cat margin is 11% of premium
Slide 13PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Large losses
Pricing
1997 to 1999 underwriting years were affected by IFA mis-selling claims
80%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1996 1997 1998 1999 2000 2001 2002 2003
UK Gross ULR Average
Source: 2004 FSA return data
Slide 14PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Large losses
Pricing
With 1997 to 1999 excluded, we see that attritional claims account for 68% of gross premium.
Source: 2004 FSA return data
68%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1996 1997 1998 1999 2000 2001 2002 2003
UK Gross ULR Average
Large loss loading = 12% of premium= 15% of ultimate claims (excluding cats)
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Section two
PricingUnderwriting cyclePI market environment
Slide 16PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
UK premium rates have hardened since 2001
Underwriting cycle
020406080
100120140160180
1996 1997 1998 1999 2000 2001 2002 2003 2004
UK Premium rate index
Source: 1996-2001 CBS indices (Lloyd’s), non-marine2002-2004 PwC estimates
Slide 17PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
US and UK markets had very similar cycles over the past decade
Underwriting cycle
Source: 2004 FSA return data, 2005 SAS Schedule P
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
US Gross ULR UK Gross ULR
Accident year data, regulatory returns.
Slide 18PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
By stripping out the rate changes, assumed claims inflation is isolated
Underwriting cycle
Source: 2004 FSA return data, 2005 SAS Schedule P CBS indices (Lloyd’s), non-marinePwC estimates
00.10.20.30.40.50.60.70.8
1996 1997 1998 1999 2000 2001 2002 2003 2004
UK Gross claims index Trendline
Linear trendline shows average UK claims inflation of 7.8%
Slide 19PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Trends
020406080
100120140160180
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
UK Premium rate index
?
Underwriting cycle
How will these claims and premium rates patterns develop in 2006, 2007….?
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
UK Gross claims index
?
Source: 2004 FSA return data, 2005 SAS Schedule P CBS indices (Lloyd’s), non-marinePwC estimates
PricewaterhouseCoopers LLP
Section three
PricingUnderwriting cyclePI market environment
Slide 21PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Issues
Allowing for sideways cover.
PI standard contracts currently leave insurers open to many claims from one source.• IFA mis-selling • No aggregate policy limits? • RI aggregation clauses
PI market environment
Premiumrate
Cost
Competition / substitutes
Value to client
£1m limit
£2m limit
e.g. solicitors
……..
£1m limit n * £1m limit
Cost / value?
Slide 22PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Threats
Increasing capacity in the market
Underwriter discipline
Claims inflation• Solicitors fees • Property values • Court award inflation
£140m claim by the F.A. thrown out last week – a high profile award might have produced upwards pressure on rates ahead of September renewals?
PI market environment
Premiumrate
Cost
Competition / substitutes
Value to client
Cost / competition
Slide 23PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Opportunities
Market growth – increasing penetration • IT consultancy• Media / advertising • PR consultants, travel agents, interior designers….
£140m claim by the F.A. thrown out last week – may deter some negligence claims against solicitors?
PI market environment
Premiumrate
Cost
Competition / substitutes
Value to client
Value / competition
Slide 24PI market - an actuary's viewPricewaterhouseCoopers LLP
13 July 2006
Summary
• Are prices going forward going to be sufficient?- underwriting cycle- cats
• If competition continues, where can margins be improved?
PricewaterhouseCoopers LLP
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