It’s a hit: April 15, 2013

No. 1 story is based on this release, which I worked on for the CAS Ratemaking and Product Management seminar. A careful read of the Insurance Journal article shows the editors there recast the story somewhat – emphasizing the impact of split rating (neutral overall, but most insureds will realize a slight decrease).

its a hit 4 15 13That’s cool with me – it’s the editors’ job to tailor a piece to their audience.


2012 Combined Ratio: 103.2

Haven’t seen the 2012 C.R. published yet, but maybe I missed it.

So here’s a chart I put together:

2012 C.R.This chart includes all the insurers that SNL Financial has captured through April 13. That means it includes mortgage insurers, which adds a couple of points in recent years. This year, eyeballing Q3 data, it looks like mortgage insurers add a couple of tenths to the industry total.

These numbers also include policyholder dividends, worth about 0.5 percentage points last year.

The AY C.R. was 105.9%, implying favorable development on prior of $12.2B, of which $3.4B occurred in Q4.

2013 hurricane forecasts

Chad Hemenway at PC360 puts the hurricane forecasts into a handy chart:

2013 hurricane forecast

The forecasts promise a worse than average season, with Colorado State projecting 72% chance the United States will get hit, vs. the normal 52% chance.

Artemis’ hurricane page looks like it will be a good one-stop shop this season, with forecasts, actual results and other details.

New Issues in Workers Compensation Pose Challenges for Casualty Actuaries

My latest, written in conjunction with the CAS.

The challenge was to describe the split point in experience rating:

What’s changing is the delineation between the primary and excess portions of a claim, known as the split point. For the past two decades, the split point has been $5,000. This value is important, because the primary portion of each claim has a much larger impact on an employer’s mod than the excess portion – the idea being that the primary loss amount is more predictive than the excess amount.

But inflation has both eroded the primary/excess split point and hurt its predictive power. These days, the mod doesn’t give enough credit to good experience and doesn’t penalize poor experience enough.

“The plan was not being as predictive as it used to be” in distinguishing between good and bad risks, DiDonato said.

The change: Raising the split point – to $10,000 in 2013, to $13,500 in 2014, and to an estimated $17,000 in 2015. These adjustments, incorporated into the entire rating formula, improve the experience mod’s predictive power.

It’s a hit!

its a hit 4 5 13I helped develop Insurance Journal’s No. 2 best-read article for the CAS.

The entire release is here.

CAS looks at healthcare

Some PR finery I worked on at the CAS ratemaking seminar.

HUNTINGTON BEACH, CA, March 12 — The key changes in federal health care reform remain months away, but property/casualty actuaries are already trying to determine what impact they will have on their own lines of business as new rules and regulations emerge.

Elements of the Affordable Care Act have been phased in since the law’s 2010 passage, but many key reforms begin January 1, 2014. The expected impact on health insurance is direct and widely studied – the law will expand access to affordable health care and attempt to rein in rising medical costs. Less obvious – but still important – are the indirect effects on other insurance lines, such as workers’ compensation and medical malpractice. Property/casualty actuaries need to consider the potential impact of these effects so they can adjust rates and reserves when changes occur.

At the Casualty Actuarial Society’s (CAS) Ratemaking and Product Management Seminar held March 12-13, two Fellows of the CAS led a discussion of the health care law’s major changes and how the reforms may affect property-casualty lines.

This particular presentation also had some very thorough slides, which are a good resource if you are looking for ways that Obamacare may end up affecting the property/casualty market.

ERM works. JPMorgan trades prove it.

Well, that’s not the obvious takeaway from today’s story about the London Whale trades:

JPMorgan Chase, the nation’s biggest bank, ignored internal controls and manipulated documents as it racked up trading losses last year, while its influential chief executive, Jamie Dimon, briefly withheld some information from regulators, a new Senate report says.

But when you dig into the New York Times story, you quickly learn that the ERM process worked quite well:

As the traders in London assembled increasingly complex bets, JPMorgan ignored its own risk alarms, according to investigators. In the first four months of 2012 alone, the report found, the chief investment office breached five of its critical risk controls more than 330 times.

The Senate report that triggered the Times story mucks through the grubby detail:

The [Chief Investment Office] used five metrics and limits to gauge and control the risks associated with its trading activities, including the Value-at-Risk (VaR) limit, Credit Spread Widening 01 (CS01) limit, Credit Spread Widening 10% (CSW10%) limit, stress loss limits, and stop loss advisories. During the first three months of 2012, as the CIO traders added billions of dollars in complex credit derivatives to the Synthetic Credit Portfolio [aka the SCP], the SCP trades breached the limits on all five of the risk metrics. In fact, from January 1 through April 30, 2012, CIO risk limits and advisories were breached more than 330 times.

The system was well-designed, and it was setting off the proper alarms.

But alarms only make noise. And JPMorgan did what any groggy soul does after a bender. It ignored the alarm:

The SCP’s many breaches were routinely reported to JPMorgan Chase and CIO management, risk personnel, and traders. The breaches did not, however, spark an in-depth review of the SCP or require immediate remedial actions to lower risk. Instead, the breaches were largely ignored or ended by raising the relevant risk limit.

Actually, that’s not fair. Morgan management didn’t ignore the alarms. They just built a new clock – here, a new VaR model. Rather famously, the new model, built in haste, sucked.

The Senate report offers a better metaphor, perhaps, via Achilles Macris in JPMorgan’s London office. He likened the synthetic credit portfolio to flying an airplane in its marvelous complexity. That would make the ERM reports like flight instruments, noted the Senate report. (Guess that’s why it’s called an ERM dashboard, duh!) Still, you can just picture the dials spinning wildly while the flight crew insists the plane is on course.

So the risk management system in place – the models, the reports – all worked just fine. All they can do is set off alarms, and they set off a lot of them, loud ones.

But no one was listening.



Towers Watson: Commercial rates up 7%

Here’s the survey.

And here’s a pretty picture:

towers q4-12All lines of business are up at least 3%, Towers said. Workers comp and EPLI had the largest increases.

I increasingly believe this is what hard markets look like now – less steep and longer lasting – thanks to more rigorous price monitoring and the management discipline imposed by Sarbanes-Oxley and Enterprise Risk Management.

Mid-market and large accounts had bigger increases than small accounts, a standard hard-market characteristic. AY2012 loss ratios are projected to be 4 percentage points less than AY2011, according to Towers, as earned price increases more than offset claims inflation. There I appear to differ from what Towers reports, as the consulting firm indicates “pricing data reported by carriers for the fourth quarter of 2012 indicated a pause in the upward industry price acceleration observed since the start of 2011.”

And whether the higher rates are also enough to offset the investment income lost to low bond yields is another question.


Mentioned that I was considering a new layout. Now you see it.


I’ll be at the CAS Ratemaking and Product Management seminar in Huntington Beach, Calif., next week.

I have to parachute in to cover a couple of talks, then leave the same day, so not much schmoozing for me.

I also downloaded the Android app for the meeting. There is an itunes app as well. They let you see the entire schedule and select the sessions you prefer.

It’s a really handy item. I used something similar at the Annual Meeting last fall.

Here is how you can download a copy.