Pricing discipline must be priority for insurers’ risk managers

Achieving price discipline and not preparing for catastrophes should be the primary focus for insurers and reinsurers when considering their own risk management practices, Aon Re Services president Bryon G. Ehrhart told the Aon Re Canada’s Rendezvous 2006 in Mississauga.Ehrhart presented several charts and graphs showing what investors have come to expect from the U.S. insurance industry over the past several years in terms of the commercial sector earnings volatility. He noted the earnings pattern of the insurance industry was three times more volatile than the standard market volatility measured by ratings agency Standard & Poor’s. Given such volatility, in which earnings could spike well above average, investors might expect larger returns from insurance industry than those averaged by S&P’s. But insurers’ earnings were only 66% of the ROE standard determined by S&P’s model. Reinsurers’ earnings were worse, at only 20% of the S&P’s ROE standard.Insurers and reinsurers could not blame the oscillating earnings patterns on industry claims fluctuations, Ehrhart said claims frequencies and severity patterns have been entirely predictable. “As an industry, we managed to create tremendous volatility out of something that, frankly, wasn’t volatile,” Ehrhart said. “How do you do that? You do it by lower pricing.”As an industry, we do a great job at preparing for the last event[But] we have to understand our trends now, and price accordingly.”Insurers and reinsurers need price modeling, he said, and they should be applying a rigorous analysis of claims data to their pricing decisions.