A mechanism is required to translate the results of the monitoring system into adjustments to pricing and future business plans.
Increased competition, narrowing profit margins, and increasing political pressure on premium levels in some statutory classes and in health insurance, mean that it is not appropriate to distance the reserving function from the price-setting and monitoring mechanisms.
Insurance companies need to know as soon as possible of any premium deficiencies or surpluses so they can adjust their pricing accordingly. In the case of long-tail classes, such as personal injury or liability insurances, long time lags exist between the claim occurrence, understanding the ultimate cost of that claim, and subsequent adjustments in the underlying premium basis. Insurers cannot afford such a long timelag.
Effective insurance business planning integrates the reserving, monitoring and price-setting functions. An output of the reserving process should include a set of defined targets for measurable key cost drivers. In the case of workers’ compensation, this may be an expectation of the number of claimants on benefit at any point in time. Expectations regarding future legal payments, settlements or notifications in a particular month are examples of other key performance measures.
These performance measures can form the basis for a timely monitoring system which measures actual outcomes against those expected. A mechanism is required to translate the results of the monitoring system into adjustments to pricing and future business plans. Monitoring can also provide an expectation of future likely outstanding claims estimates so that any changes in experience are known sooner and can be more effectively managed.
Key specialist: Noeline Woof
 | Relevant experience:
- General insurance specialist
- Particular expertise in price setting, monitoring and reserving for statutory schemes
- Experienced in developing monitoring frameworks which link the performance of key cost drivers to adjustments in pricing and reserving
- Advisor to self insurers on devolution of performance incentives for effective management of workers’ compensation costs
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