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  • Slide 1
  • The Underwriting Cycle Are Loss Reserves Reasonable in Light of Potential Underwriting Cycle Biases? December 2, 2011 PwC Actuarial and Insurance Management Solutions (AIMS)
  • Slide 2
  • Slide 2 Agenda Introduction Pricing trends Inspection of reserve adequacy Implications on profitability
  • Slide 3
  • Introduction Slide 3
  • Slide 4
  • Slide 4 What is the underwriting cycle? Soft market Excessive capital Highly competitive Inadequate premiums Easing of terms & conditions Hard market Less capital available Less competition Better price adequacy Stricter terms & conditions
  • Slide 5
  • Slide 5 How does the underwriting cycle impact reserves? Pricing Bias Potential Reserving Bias
  • Slide 6
  • Slide 6 How does reserve adequacy impact pricing? Reserving Bias Potential Pricing Bias
  • Slide 7
  • Slide 7 Inherent link? Reserving Bias Pricing Bias
  • Slide 8
  • Pricing trends Slide 8
  • Slide 9
  • Slide 9 Pricing trends poll According to MarketScouts Market Barometer Report, what is the average monthly composite P&C rate change for 2011? a)+5% or more happy days are here again b)0% to +5% rates are moderately up c)0% to -5% rates are moderately down d)-5% or less where is the bottom?
  • Slide 10
  • Slide 10 Industry average rate changes Source: www.MarketScout.com
  • Slide 11
  • Slide 11 Industry average earned rate index Source: www.MarketScout.com
  • Slide 12
  • Slide 12 Industry average earned rate index Source: www.MarketScout.com hard market soft market
  • Slide 13
  • Inspection of reserve adequacy Slide 13
  • Slide 14
  • Slide 14 Reserve accuracy poll At year-end 2010, what percentage of US P&C insurance companies hindsight reserves from year-end 2004 were within -10% to +10% of their originally recorded value? a)73% isnt it called actuarial science? b)52% but on the other hand, theres loads of judgment c)37% loads and loads of judgment d)12% but at least it cant be negative
  • Slide 15
  • Slide 15 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million Source: SNL, 2010
  • Slide 16
  • Slide 16 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $500 million Source: SNL, 2010
  • Slide 17
  • Slide 17 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million, ex 2000 & prior Source: SNL, 2010
  • Slide 18
  • Slide 18 Percentage of companies with 2010 hindsight reserves within X% of initial recorded reserves Companies with initial recorded reserves in excess of $500 million, ex 2000 & prior Source: SNL, 2010
  • Slide 19
  • Slide 19 Percentage of companies with 2010 hindsight reserves within 10% of initial recorded reserves Companies with initial recorded reserves in excess of $1 million by line of business Source: SNL, 2010
  • Slide 20
  • Slide 20 Calendar year-end hindsight (redundancy)/deficiency Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010
  • Slide 21
  • Slide 21 Accident year hindsight (redundancy)/deficiency Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010
  • Slide 22
  • Slide 22 Accident year and calendar year hindsight emergence Emerged (redundancy)/deficiency as a % of initial booked reserves Source: SNL, 2010
  • Slide 23
  • Implications on profitability Slide 23
  • Slide 24
  • Slide 24 The current market Lengthy soft market Potentially inadequate rates on recent accident years Possible optimistic pricing & reserving 5 consecutive years of reserve take-downs Calendar year operating results propped up by prior year releases Releases mask accident year profitability issues Erosion of reserve redundancies Weak macro-economic environment Low investment income
  • Slide 25
  • Slide 25 What drives the move from a soft to hard market? According to the III, need the confluence of 4 criteria 1.Sustained period of large underwriting losses 2.Material decline in surplus/capacity 3.Tight reinsurance market 4.Renewed underwriting & pricing discipline
  • Slide 26
  • Slide 26 Prospective implications of underwriting cycle Is trouble ahead? Several consecutive years of inadequate rates Reserve redundancies used up? Low investment returns Market reactions before turn? M&A Coverage modifications
  • Slide 27
  • Slide 27 PwC Actuarial & Insurance Management Solutions Scott Cederburg, FCAS, MAAA r.scott.cederburg@us.pwc.com (678) 419-1539
  • Slide 28
  • 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Thank you

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