Project staff and support

Katharina Schwaiger (Intern)
Anton Solak (Company supervisor)
Gautam Mitra (Academic mentor)
Vera Hazelwood (Technology Translator)

This 5-month Internship project was carried out at ACE Limited, in conjunction with CARISMA, Brunel University. It is part of the KTN's Industrial Mathematics Internships programme, co-funded by EPSRC.

Katharina Schwaiger, Intern & PhD student at Brunel University said, “My internship at ACE gave me the opportunity to get insight into the insurance industry. The mathematical skills gained at university, current academic research and an interesting project problem given by ACE managed to bridge the gap between academia and industry. The whole experience was for me very interesting and challenging and I had the feeling that my work "made a difference"."

Project summary

The ACE Group of Companies is a global insurance and reinsurance leader in property, casualty and financial services. ACE European Group delivers services to clients across Europe trading under three brands: ACE Europe, ACE Global Markets and ACE Tempest Re.

The focus of this Internship project was to help ACE develop a simulation model of the underwriting cycle in order to make predictions about the direction of insurance prices. The underwriting cycle is a phenomenon caused by alternating hard and soft markets in the industry. Hard markets mean restrictive underwriting standards, high prices and high profits, while soft markets bring relaxed underwriting standards, low profits and low prices. The characteristics for these cycles vary by country and product line.

Most if not all of the academic literature addressing models of the general insurance cycle focuses on a calendar year measure of underwriting profitability. While such models are instructive, a calendar year loss ratio (claims divided by earned premiums) is not an accurate measure of current price adequacy since it also includes reserve releases or additions from prior years. The ideal measure would be a policy year loss ratio, but this information is generally difficult to come by for the industry. Accident year loss ratios (taking into account losses that were incurred within the 12 month period), however, are available in the industry data for the past 20-25 years, and provide a more unbiased view of the current pricing environment than a calendar year number. Further, an accident year model is of far greater utility to ACE.

The model developed in this Internship project will serve two purposes. First, it will help make predictions about the direction of insurance prices over the medium term. Second, it will ultimately be integrated into ACE's economic capital model and serve as the basis for simulating the underwriting cycle over a multi-year period. This will allow ACE to use a risk profile more consistent with its status as an ongoing enterprise, rather than be confined to reflecting only business written in the coming year.

"ACE is thankful to have had the opportunity to benefit from the industry internship programme in general, and Katharina's abilities in particular. The work that Katharina has done constructing and parameterising a model of the general insurance pricing cycle represents a significant step forward in this area. We think that this project will serve as the basis for an important step forward in our business planning and capital modeling efforts", said Anton Solak, Vice President and Senior Actuary, ACE Limited.