Aon | Professional Services Practice
The risk retention series:
How Actuarial Analysis Helps Professional Services Firms Make Risk-related Decisions
Release Date: January 2022
The Professional Services Practice at Aon share insights to help firms navigate a hardening insurance market in the seventh article in a series exploring risk retention.
In previous articles, we discussed the recent firming of the commercial insurance market. Some firms are perhaps facing challenging renewals with a combination of one or more of the following: increased retentions, higher rates, imposed co-insurance requirements along with decreasing capacity.
In this environment, professional service firms should consider all options when managing their insurance program. This discussion will outline three distinct areas where actuarial analysis can help a firm improve its decision making.
- Program retention and total cost of risk – As was discussed in “Actuarial models are powerful tools to assess risk”,
actuarial analysis is important in a firm’s approach to risk quantification. A major aspect of these analyses is historical claims data.
Firms with a frequency and/or severity of claims history tend to see higher increases in premium and rates at renewal than firms with few or no claims.
A solid understanding and appreciation of the impact of your claims history is essential in negotiating and choosing from alternative quotes and program structures
(e.g., different retention options). Loss projections can be created for alternative program structures and then compared based on the “total cost of risk” (risk transfer premium plus retained losses). This is vital information when considering annual budgets and overall strategies for risk management. Firms that undertake an actuarial review of claims data are better prepared for understanding the impact of increased rates or alternative retention levels in their upcoming renewals.
- Choose program limits – In our position as a broker for professional services firms, we have noticed an uptick in the number of severe claims. This trend is concerning for insurers, as this increase greatly impacts their profitability. Actuarial analysis can assist firms in determining the impact of a severe claim, offering insight for a discussion about a firm’s risk appetite and helping to identify the appropriate amount of risk transfer. It is important to note that actuarial analysis does have its limitations and is not an absolute when determining program limits. It should be viewed in the context of the overall goals for a firm’s risk appetite with their program. Actuarial analysis also allows consideration of losses for the overall industry, not just the individual firm’s losses. If this data is available, the losses of the industry can be integrated into a firm’s risk management approach. Large claims that arise from certain policy years or areas of practice can be included. A firm can understand and plan for claims that “could happen to me” given that the firm that suffered a large loss may have a similar structure, client exposure or practice areas. Incorporating outside claims experience into the actuarial analysis allows a firm to better prepare for worst-case scenarios.
- Evaluate pricing – Actuarial analysis can also assist your evaluation of insurance pricing by comparing it against pricing suggested by the market’s loss projections. The premium levels quoted by underwriters are often based on the insurer’s actuarial projections. The resulting premiums can be compared against your results, which can be used as a yardstick to understand the insurer’s view of your risk profile. In some circumstances, this leads to valuable insights for negotiating premium and program structure.
Actuarial analysis prepares firms for upcoming policy renewals. It is not an exact prediction of expected insurance costs but instead an additional valuable step in managing risk programs. A firm that can quantify their risks can better budget and plan for the future.