Letters
Defining Renewal Business
the article “Market Timing—In Search of the Going Rate” (May/June 2012
Contingencies) discussed variations
among surveys used to track property/
casualty market rates. One reason for
variations is the difference in the definition of renewal business.
The article notes that only one of four
surveys attempts to capture new business
changes, which isn’t entirely true. A renewal change for buyers may be a new
business change for an insurer or broker.
And a renewal for brokers may be new for
a particular insurer. Even within
a single category of survey respondent, dissimilar indications
on renewal pricing can be traced
to differences in the exposure
data captured or utilized and to
differences in exposure adjustments to a current basis.
Insurers’ definition of renewal business is relatively
straightforward—a newly issued
policy that is associated with an
expiring policy. Renewal for an
insurance buyer has a different
meaning—the insurance program or programs (and possibly
self-insurance mechanisms and other
costs) for the current period compared
with the prior period. For the buyer or
risk manager, the total cost of risk by
financial time period is the relevant
equivalent for renewal price. Whether
the same insurers are involved and/or a
current insurance policy relates to a specific previous one is largely irrelevant.
Defining renewal from an agent/
broker perspective may be even more difficult. Retaining the client account is the
objective. Maintaining or changing carriers is a means to facilitate client retention.
Broker roles in restructuring programs
and coverage and in offering risk management services, moreover, can’t be
measured appropriately by one-to-one
renewing versus expiring-policy metrics.
10 CONTINGENCIES JUL | AUG. 12
Insurers’ definition of
renewal business is relatively
straightforward—a newly issued
policy that is associated with
an expiring policy. Renewal
for an insurance buyer has
a different meaning—the
insurance program or programs
(and possibly self-insurance
mechanisms and other costs)
for the current period compared
with the prior period.
These different perspectives lead to
variations in exposure adjustments when
compared with traditional insurer methodologies. Insurers are concerned with
ratable changes—a combination of quantitative variables (payroll, sales, etc.) that are
measured continuously or in ranges and
categorical variables (SIC code, class, location, etc.). The exposure variables need to
be factored into rate monitoring reflecting
the limit and attachment of the policy. Insurers capture different exposure data and
use varied rating plans. It’s not uncommon
for two or more insurers sharing a renewal
to have different numbers for the renewal
rate change, particularly for larger risks
and more complex coverages.
While agents/brokers and insureds
would input market price information
adjusted by the insurers’ methodology
into placement and buying strategies, their
perspective on exposure would differ.
