What data should Lloyd’s Coverholders be providing to capacity providers?

By Asad Khalil FIA

Originally published on LinkedIn on 1 June 2020.

I ran a LinkedIn Poll last week, the question was: Underwriters what is frustrating you the most about your delegated authority business? The link to the poll is shown below.

https://www.linkedin.com/posts/activity-6670943698123030528-trrB

Unsurprisingly over 50% of those who answered said the biggest issue was the quality of data. I couldn't agree more.

Having worked on numerous binders I thought I would share my thoughts on what I have seen in the market. What is very clear is that there is a large variation in the quality of data being provided, some very good and some not so good.

For any type of delegated authority business the capacity provider would want some assurances around the performance of the binder. An annual review usually takes place to determine what the historic performance has been like and what it is likely to be for the following year.

This is where the data of a coverholder will end up on the desk of an actuary. There will be a basic list of data requirements which include but are not limited to the following:

a) Individual loss data

Whilst this should be readily available its rare that this level of granularity is provided. What is more common is a loss summary on an aggregated level. That is usually sufficient for a well performing binder.

However if loss experience has deteriorated an individual claims listing can help identify the types of claims impacting the binder and will make it easier to use more sophisticated frequency/severity modelling techniques.

b) List of large losses

If the individual claims data is provided the large losses can be identified from this. If a claims summary is only provided then large losses would need to be identified as they would be trended differently in the modelling process.

c) Triangulations

Triangulations for claim numbers and incurred claim amounts allow the actuaries the project the losses to their ultimate position. If these are not provided then benchmarks development patterns will be used, if these patterns develop slower than the actual experience of the binder then the actuaries projection of the performance will be worse than what the Coverholder expects.

d) Gross Written Premium and rate change

GWP for the historical and the forthcoming year is almost always provided. What is often missing is the corresponding rate change information which is needed to calculate the on-level premiums. Providing the correct rate change information especially if rate increases have been positive will have a positive impact on the projected ultimate gross loss ratio.

e) True underlying exposure

For lines of business such as property the sum insured values are usually available due to potential catastrophe exposure, however it is mostly provided for the current year. If the capacity provider has stored this information every year at renewal, they will have a good understanding of what this should be. That said the coverholder should take ownership of this as the capacity provider could change in the future.

For other lines of business the true underlying exposures are almost never provided.

f) Brokerage/coverholder fees and carrier expenses

The capacity provider will usually have this. This allows the actuary to calculate the combined loss ratio.

How Perrenial can help

Capacity providers often have teams of pricing actuaries analysing the performance of their delegated authority business. Our binder and coverholder portfolio analysis helps MGAs and Lloyd's coverholders understand their own data, project forecast gross ultimate loss ratios and go into capacity renewal meetings with a stronger negotiating position. We also help MGAs build and develop rating models through our MGA pricing service.

Preparing for a capacity renewal? Contact Perrenial