Game theory aims to shed light on outcomes where multiple actors operate. Dry academe often assumes “ceteris paribus” even in social sciences, but in the real world when we are trying to anticipate the outcomes of decisions one actor makes it is essential to consider the possible and likely responses of other actors. Focus on their incentives to understand what they will do.
The twin themes of game theory and incentives course through all of life, including business life. Once you know what to look for and recognise, you see it everywhere from the kindergarten to Camp David.
Possibly the best known example of game theory in practice helps us understand the nature of bilateral relationships that can veer to the fractious: Mutually Assured Destruction.
MAD underpinned the Cold War nuclear calculus. With nuclear weapons that would be certainly be fired in retaliation to any pre-emptive launch, it entirely disincentivized any such pre-emptive strike. Within the defining framework of such knowledge (which assumed decision-making power structures were rational as to each side’s own interest), something like normal diplomatic relations and, for example, weapon reduction treaties, were possible.
Yes, game theory often concerns itself with matters that are far from a game.
The relevance of this point for MGA arrangements is that if they are one-sided you cannot establish normal relations that should ensure the spoils are fairly shared. If a carrier is able to exit at short notice “for convenience”, it holds unreasonable power over the MGA. But equally the MGA needs to accept submitting to sanctions should it fail to meet reasonable targets. Only within a framework bounded by each party’s power over the other will there be a fair ability to operate and negotiate long term mutually favourable outcomes.
The Calibrant approach to contracting MGA / Carrier arrangements is to have hard limits that should never come to play but which encompass some inner-tramlines that define normal operating outcomes. For example:
Within such a contractual framework, the management of performance within a productive relationship, that never needs to invoke hard contractual rights, is entirely possible over the long term. This marries a typical MGA need – committed and stable capacity – with the carrier’s objective for business outside its core operations with reasonably assured margins. It’s a game where everyone’s a winner!
There has been a lot of speculation recently around the use of AI in insurance and how this signals the death knell for Underwriters. Having mopped up the coffee that I spat out and checked my life insurance provisions, this got me to thinking. Surely not all underwriters? But if not, then who?
The ineffable question of the “effs”. What should a business aim for – and more specifically, for us, the underwriting function in an insurance business – efficient operations or effective decision making?
We have all heard of the boiling frog syndrome which says: if a frog is put in boiling water, it will jump out to protect itself. However, if you place a frog in cold water and slowly turn up the heat, it won’t notice the subtle increase in temperature and be boiled alive.
In various parts of our lives, we are examined and tested to grade our ability and knowledge, be that driving tests, ‘A’ levels, or piano exams.
And so it is with the insurance industry. Boards and regulators are increasingly pushing for demonstrable oversight. This is especially true in the field of Delegated Authority (DA)…
Managing General Agents (MGAs) provide insurers a broad opportunity for profitable growth. Operating in niche sectors with lean efficient models and providing customers with products that they often find hard to come by in the mainstream. All of this is wrapped up with the relevant expertise and providing insurers with access to markets that…
As 2022 was drawing to a close, insurers across the UK were starting to look at their results, keeping their fingers, toes and everything else that they could, crossed in the hope that December would fizzle out in a whimper.
But alas it was not to be as temperatures plummeted and the industry suffered…
What use statisticians and actuaries when the world is being transformed by modern data-analysis techniques? What hope for clunking humans in the era of Big Data (Facebook sells data which influences US presidential elections), of Artificial Intelligence (China can identify disliked racial groups through automatic facial recognition technology)…
Catastrophes – natural events where one “system” (wind, earthquake etc) causes multiple insurance claims in one go – are difficult. Much else in insurance pricing is subject to conceptually simple averaging-over-time, but cats are different. You can’t take a 5 or 10 year history of natural-peril losses and assume you have an accurate view of exposure to catastrophes…
In part 1 of this triptych on insurance pricing we looked at Technical Price (TP): what must be covered over the long run to make reasonable profits. I finished that note by considering TP in the context of the market. Here, I take this theme further and explore more how to think strategically about pricing.
This note covers the fundamentals: the three building blocks of a technical price and a note on the role technical price plays. It is followed with a deeper look at pricing strategies. Finally we consider a knotty topic, cat(astrophe) pricing, in particular the use of cat models to inform the price.
On 26th September 1983, at the height of the Cold War, Soviet missile monitoring picked up apparent signs of five nuclear missiles launched from the US. Retaliation was the default planned reaction.
Charles Dickens opened A Tale of Two Cities with these lines, contrasting calm enlightenment London with turbulent revolutionary Paris: “It was the best of times, it was the worst of times…
Calibrant was established to bridge a gap. The gap is that between MGAs and their carriers. And it finds many forms.