CAT Risk Management and Improving Distribution Networks Addressed at MarketStance Workshop

“Finding and Filling Gaps: Exploiting revenue opportunities in a changing commercial lines market” was the title of a MarketStance workshop held September 12, 2007, in Sturbridge, Massachusetts. The one-day event featured both a strategic and tactical learning track and offered those in attendance perspectives on:

• CAT risk management techniques
• Approaches to managing distribution networks
• Insurance to value strategies
• How to approach problem solving with MarketStance data
• Understanding data differences
• And more

MarketStance Founder, Fritz Yohn, made a thought-provoking presentation on CAT Risk Management. Said Fritz, “The big CAT modelers try to model for absolute risk. Our position is that this in unknowable. Relative risk, however, is readily quantifiable. While PML (probable maximum loss) will always have a place in CAT management, our position is that by focusing on relative risk, particularly in today’s competitive landscape, carriers can find opportunities in which they will be protected from softening rates without overly exposing themselves to CAT losses.”

According to Fritz, geography has been viewed as the primary dimension for managing an insurer's hurricane-related CAT risk in part because miles from the coast is a good proxy for risk of loss from hurricanes. It also yields straight-forward territorial underwriting strictures and is simple for carriers to adopt rapidly.

While avoiding coastal areas reduces a carrier’s current PML, this is achieved at a cost: abandoning large pockets of premium potential, intensified competition as carriers focus on the same lower risk territories, strained agency relationship, regulatory fall out, and reduced growth potential as focus shifts to lower risk, lower growth counties.

Using class of business analysis as another dimension in CAT risk management, he explained, provides carriers with more selective methods for addressing CAT risk, such as: excluding certain classes entirely, focusing on the most desirable classes, adjusting territory/class rating factors, modifying coverage, rounding accounts and managing agency production. He went on to walk through various methods for applying these tactics.

In his presentation on “Finding and Filling Gaps in Your Distribution Network,” MarketStance Director of Production and Analytic Services, Chris Wolland, made a case for the value of knowing the fit of your underwriting appetite to specific geographic territories. “Individual market share decreases as underwriting fit declines,” he said. Therefore, appetite fit analysis is essential to finding glaring gaps in market share and untapped opportunity. An appetite that fits one state/county may well be a poor match for another territory, he warned.

“It’s also important to remember that the number of classes in your appetite isn’t what’s important,” he added. “What is important is to focus on premium potential.”

Also beware that commonly available market share metrics (such as those produced using A.M. Best data) will produce MSA-focused findings, with the typical outcome being additional appointments in the same areas and a resulting increase in competition and deterioration of underwriting results. By focusing instead on counties/territories with enough potential to justify resources and where current position is lacking, carriers can identify areas that are less well served and that offer fresh potential.

With this analysis complete, said Chris, then you turn your attention to how well currently appointed agencies cover this “new” territory. He demonstrated a variety of metrics and methods for evaluating agencies and their fit within a carrier’s current distribution network.

Additional workshop presentations focused on how the way you count businesses impacts what the resulting data tell you, some techniques for improving on Insurance to Value. and various how tos for using data to answer questions and solve problems.

Dave Reddick from NAMIC also provided a review of regulatory and legislative developments in the two years since Katrina struck.

If you’d like a more thorough discussion of Fritz Yohn’s CAT Risk Management insights or Chris Wolland’s Distribution Network presentation, contact MarketStance.

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