Section 9 : Portfolio analysis

Question 1

What are the 4 ways to monitor claims

Answer 1

1. review claim summaries (reports)
2. review individual large losses and Cats
3. Meet claim representatives, UW and reinsurance teams
4. Quantitative analyses comparing actual and expected claims

Question 2

What are the focus areas specific to Ratemaking that you want to monitor/ be aware of

Answer 2

1. Regulatory changes (trends and reforms)
2. Changes in Portfolio (mix of business)
   Overall rate adequacy of Portfolio (deterioration of experience might be caused by poor rate execution due to competitiveness)
3. Expected vs actual claim experience (indicator of changes in trend if actuals > expected)
4. Expenses (compare actual expenses with expected)

Question 3

What is the role of interpolation in portfolio monitoring, and why might spline methods be preferred?

Answer 3

Interpolation fills gaps in development patterns; splines allow smoother transitions and better fit across varied data.

Question 4

Explain how a worm graph helps detect emerging issues in claim development.

Answer 4

A worm graph shows cumulative development over time by accident quarter. Sharp “upward bends” may signal emerging deterioration.

Example:
If AY 2023 was stable until Q3, then suddenly jumped in Q4, the worm graph would reveal this visually. Actuaries should investigate: change in reporting, new claim type, trend?

Question 5

How would you investigate an unexpected increase in the actual-to-expected claims ratio?

Answer 5

Analyze changes in mix, reporting lag, severity, exposure growth, regulatory changes, and compare against forecast assumptions.

Question 6

Why must actuaries monitor both market pricing and internal pricing metrics?

Answer 6

To ensure competitiveness while maintaining adequate technical pricing and profitability

Question 7

How might a compliance breach affect portfolio profitability?

Answer 7

It can result in regulatory fines, reputational damage, or forced portfolio adjustments (e.g., rate reductions or withdrawal).

Question 8

Why is elasticity important in commercial lines pricing decisions?

Answer 8

Elasticity measures how sensitive customers are to price changes. High elasticity means small increases cause lapses.
* Super important for retention

Example:
If customers leave after a 5% price increase, consider splitting the increase over renewals (e.g., 3% + 2%) or offering value-add services to retain.

Question 9

Describe a scenario where re-underwriting the portfolio might be required.

Answer 9

If actual loss ratios consistently exceed expected, driven by poor risk selection or mispriced segments

Question 10

What are the potential issues when using cumulative development factors for claims analysis?

Answer 10

They can mask recent adverse development or distort comparisons when applied to incomplete data.

Question 11

How can cross-selling initiatives improve portfolio performance beyond top-line growth?

Answer 11

They improve retention and customer lifetime value, leading to more stable, diversified portfolios.

Question 12

What considerations are involved in designing a price cap strategy for renewals?

Answer 12

Balancing fairness, profitability, system limitations, and competitive positioning.

Question 13

How does monitoring underwriting authority levels contribute to pricing discipline?

Answer 13

Ensures pricing is aligned with technical guidance, limiting deviations that could erode profitability.

Question 14

Why is linear interpolation sometimes inappropriate for claim development?

Answer 14

Linear interpolation assumes uniform progression, which may not hold in volatile or tail-heavy lines. It can under/overestimate values between development ages.

Example:
In bodily injury, where claims often settle late, linear methods might understate expected development at month 24–30. A spline or power curve fit better captures the shape.

Question 15

What’s the risk of not reconciling actual vs expected development in portfolio monitoring?

Answer 15

It may hide deteriorating experience, leading to delayed action in repricing or reserving.

Example:
Expected CY loss development for AY 2022 was 15%. Actuals came in at 25%. If this is ignored, pricing assumptions for 2023 will be flawed, and capital may be underreserved.

Question 16

What metric helps detect if competitor pricing changes are affecting your retention?

Answer 16

🔹 Metric: Change in retention by segment vs. competitor rate filings
Example: If retention on older drivers drops after a competitor’s 5% discount, it may warrant tactical pricing adjustments or loyalty discounts.