Analytical strategies for a hardening market


Analytical strategies for a hardening market


With continued reports of double-digit rate increases for some coverages, companies are looking to analytics to leverage their position with insurers and create new strategies for dealing with a hardening market, say Sigma’s Lori Ussery and Michelle Bradley.

As the market hardens, insurers often bridge the gap between pricing and actual experience by increasing rates and lowering capacity. Consequently, companies may experience increased premiums, higher retentions, lower policy limits, carve-outs of certain risks, or any combination of the above. They are asking: “Why did the price go up that much?” and “What can I do to mitigate this increase?”

Companies that regularly conduct actuarial analyses may already have significant information that will help them manage the impact of market deterioration.

Companies attuned to their unique loss history and current challenges prior to renewal have an advantage when negotiating rates and terms with carriers. 

Pure loss rates and frequencies, common to most actuarial reports, can be tracked over long periods of time and are especially helpful in identifying trends. Many actuarial reports also contain breakout analyses by geography, injury type or claim type.

For example, an analysis for property perils, such as windstorms, fires, earthquakes and floods, may be completed based on a company’s unique loss history (if a sufficient volume of data is available), advanced catastrophe models of the company’s unique risk profile or a combination of the two. These analytics help companies identify trends in losses for certain perils over time, specific areas needing special attention and areas where the blend of risk retention and transfer may need further review in light of current pricing.

Companies attuned to their unique loss history and current challenges prior to renewal have an advantage when negotiating rates and terms with carriers. Demonstrating to underwriters any improved performance over time, reasons why the programme is unique in its sector and current strategies to address areas of concern may help mitigate rate increases.

Carriers typically welcome useful input that has been prepared in advance by an independent third-party actuary and will often share their internal workpapers for comparison purposes. This allows both parties to isolate any key areas of difference. Something as simple as an insurer using its overall internal loss development factors without giving credibility to the insured’s unique factors may result in a large dollar discrepancy for both the historic and the projected periods.

On the other hand, the results from an independent actuarial analysis may support a price increase. In this case, companies already relying on analytics may be ahead of the curve if they can present carriers with the strategies being implemented, or that are already in place, to deal with deterioration. 

How to succeed

Companies new to using analytics must identify and address problem areas proactively and quickly. Over time, the success (or failure) of specific strategies for addressing the problematic areas may be monitored and adjusted based on the emerging data. This may involve even greater drill-down analytics by location or claim type.

Multiple sources suggest that liability rates are on the rise partially due to “social inflation”. While some industries, such as healthcare and transportation, have felt the direct impact of increased jury awards and defence costs, other industries are not left unaffected as insurers recognise the need to strengthen overall reserves. While this trend may be difficult to mitigate, estimating its potential impact on losses allows management to develop a plan for funding this expense. Analytics focused on litigated claims may be useful: injury type, reporting lag, settlement lag and overall trends in the percentage of litigated claims.

In a hardening market, analytics also serve to test the validity of alternative ways to transfer and retain risk. Companies may find value in the expanded use of existing captives or creation of new captives. Captives are to some extent insulated from the cyclical effects of the market. Mature captives with accumulated capital and surplus may be able to support the risk of funding more volume by increasing limits and/or expanding coverage for existing risks.

It may also be useful to consider diversifying the risk portfolio of the captive by adding new risks, whether traditional or emerging. Aggregating multiple risks in a captive often creates more stability in losses and expanded capacity for aggregate reinsurance solutions, thus reducing the total cost of risk. Analytics play an important role in this process, giving decision-makers the necessary information to assess the financial stability of the captive considering the effect of any proposed programme changes.

Analytics involved in the front-end captive feasibility process include a review of the impact of losses on proforma financial statements. This is an iterative process that allows companies to weigh the expected cost of various risk retention and transfer scenarios anticipated to be written by the captive. The effects of adverse loss scenarios are also reviewed to test the viability of the captive’s financial position under stress. These analytics assist in determining appropriate levels of startup capital and premium to support losses and expenses.

The goals of analytics in facing a hard market are similar to the overarching goals of an enterprise risk management strategy. This perspective can pivot companies away from questions focused on price increases and current market environment to questions centred on best strategies. In any enterprise risk process, risk should be identified, quantified and monitored to develop ongoing and changing strategies to finance and mitigate risk.

Analytics support all phases of this process: identifying emerging risks or problem areas; quantifying the related severity and frequency of each risk profile; and monitoring the effects of strategic processes implemented to mitigate risk in these areas.

Companies relying on analytics as a key tool for continually developing, monitoring and adjusting their strategic goals find confidence in decision-making and build stronger partnerships within the industry, irrespective of the state of the market. The hardening market has created an increased awareness of the need for data-driven decision making. Companies should take this opportunity to rely on analytics to develop new strategies to face current market conditions head on.


Lori Ussery is an actuarial consultant at Sigma.

Michelle Bradley a consulting actuary at Sigma. They can be contacted at:

Sigma, Lori Ussery, Michelle Bradley, Analytics

Captive International