1. Rate monitoring has become one of the hot topics in general insurance.
2.Underwriters are starting to see the importance of managing the underwriting cycle in a softening market.
3. It is important to monitor the rate movements on business quickly and accurately in order to shorten the period before any disruption to the business plan assumptions are detected and acted upon.
4. Many people focus solely on the rate movements on renewal business while neglecting the absolute profitability of the renewing business (not just its relative profitability as compared to last year) and the profitability of lapsed and new business.
RENEWAL-CENTRIC
1. We can estimate the profitability of a piece of business simply based on the premium and the initially expected claims – this ratio is referred to as the Initial Expected Loss Ratio (IELR).
2. Rate monitoring systems that only focus on renewals could be producing incorrect answers.
3. If premium-weighted average of the renewal rate movements is taken, the figures might be wrong.
4. An alternative would be an average weighted by the expected claims for the policy but unfortunately this can only be done if an IELR is available.
UNDERWRITERS
1. There is a natural tendency for underwriters to focus on the last few risks they wrote or a few bad examples that are skewing the big picture.
2. There are instances when the use of judgement might be better than the use of highly scientific but substantially incomplete statistics.
3. It is difficult to accurately consider current partial underwriting year’s experience (projected for the full year) against the last full year’s underwriting experience and to condense that analysis into a single number.
4. In addition to the simple rate movement on renewal business, it is necessary to estimate an IELR for each policy. This can be done whenever a technical price is calculated.
PRACTICES
1.It is norm for the underwriters to write more profitable renewal business that shows a rate reduction than less profitable new business.
2. Underwriters tend not to shy away from renewal business because they know that they will get a hard time explaining why they have written a risk that is off 20% compared to last year. This is a consequence of monitoring renewal business.
