March 23rd, 2017

Strategic Growth Analysis – The Guy Carpenter Approach: Part II

Posted at 1:00 AM ET

chu_julia_photograph-smJulia Chu, Managing Director

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The analysis progresses with a retrospective financial analysis that demonstrates “what if” the company had a share of the wallet in that particular business. Synergies between the existing business and growth opportunities can be exposed. Our research compares annual volatility, which is the standard deviation of ten or more years of a company’s underwriting margin, with the pro-forma profitability or five year average underwriting margin if the company had written specific businesses.

Figure 2 (below) provides another hypothetical company example:

  • if Company A had written excess and surplus property insurance, its profitability would have increased, but at a cost of some underwriting margin volatility;
  • additionally, writing California and Florida homeowners insurance would have increased profitability but kept volatility unchanged;
  • writing national homeowners insurance however, decreased volatility and kept profitability unchanged; and
  • writing small commercial multi-peril decreased volatility to the largest degree but only slightly decreased profitability.

If this retrospective view shows company compatibility with specific states and lines of business, there is an option for further analysis under a prospective view.

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Guy Carpenter’s BenchmaRQ® platform helps clients understand the prospective impact on return and volatility. Observations based on historical events may not encompass the full potential of risk associated with the business - particularly true for catastrophe events because the range of potential events can be difficult to observe in the historical data. Capital model results bridge the historical analysis with a current view of the potential risk, enabling measurement and decision making in a risk-aware framework. The retrospective and prospective analyses provide insurance companies with real data for decision making to drive growth plans.

The same framework can be used to measure the impact of mergers and acquisitions, exiting a particular line of business or other strategic decisions where understanding the trade-off between return and risk is part of the decision-making process - ensuring strategic options are aligned with the company’s risk appetite and risk tolerance.

Link to Part I>>

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