Six Steps for Pricing Property Risks - A Facultative Reinsurer's Perspective
The insurance industry has enjoyed three good years in a row. Reinsurance costs are lower and there is a global reduction in large property losses from all causes. After three good years, we could think this low loss frequency and low RI cost is the new normal. And many seem to think it is, taking a simple approach to pricing Property Risks:
Current Pricing Method = Expected reinsurance cost + Premium to cover the normal loss expectancy + Internal and external expense components + Profit (tiny)
This pricing method seems to have worked well. So well, in fact, that market share and new business growth are driving most of the global markets.
However, like many of us, you may have been in the industry for at least a couple of decades and have memories of some bad times: the head office suddenly shutting down a section of the business because it was running so badly; regulators questioning reserve adequacy; coming to work one morning to find the company you worked for has been sold and the company name and your colleagues’ faces have been reduced to distant memories.
In a perfect world, reinsurance costs would be constant, normal loss expectancy would be the same decade after decade and we would all have access to reliable data-based pricing tools. Natural catastrophes would always happen exactly as modelled.
However, we all know the recent experience is not going to continue in the same way.
Some markets simply lack reliable data. Catastrophes never behave as modelled. Reinsurance costs swing with the market and normal loss expectancy can turn into a freaky run of bad luck.
How do you make sure you’re pricing those large Property risks for the real world?
1. Take time to understand the risk and the policy wording. Recording a summary - in your own words to explain the risk and policy coverage on the file - can help.
2. If you have big data-derived tools to help with pricing, use them - but don’t rely solely on them. They are meant to be a guide, not a substitute for underwriter judgement.
3. If you do not have access to pricing tools, make assumptions based on normal loss expectancy over the last 20 years or so rather than just the last three.
4. Consider reinsurance pricing volatility when determining reinsurance costs (current RI costs may not always be like this.)
5. Have you thought about and priced for policy coverage extensions, such as machinery breakdown, contingent business interruption, prevention of access, etc?
6. Then stand back and ask yourself, does this price and coverage look logical?
7. A good final step is to ask a learned colleague or trusted reinsurer if this deal looks right. Underwriter-to-underwriter dialogue with a respected colleague will always be beneficial to staying competitive.
After the next market disruption, run of bad luck, or change in management - when all your judgements are open for review - you can relax, confident that you priced the business properly.
Gen Re underwriters have the combined experience and perspective to help you navigate this market.