Scenario Analysis to Expose Unchecked Expert Adjustment Risk

The scenario that reinsurance leaders—the board, the CUO, the CFO, and the CRO—should run for pricing models with unchallenged expert adjustments is a stress test that assumes the expert adjustments across the portfolio are consistently adverse: the technical price was more accurate than the adjusted price, and the adjustments that were applied to win or retain business were unnecessary. The scenario calculates the impact on the portfolio's combined ratio, return on capital, and earnings under plausible assumptions about the adjustment rate, magnitude, and accuracy, and it answers the governance question: are the expert adjustments the portfolio is absorbing a manageable pricing variance, or are they a material risk to the portfolio's profitability that the governance framework must control? For boards and risk committees, the scenario is the stress test that reveals whether the enterprise's pricing-governance framework is adequate for the actual adjustment volume the portfolio is experiencing.

Why does the adjustment scenario matter more now?

The adjustment scenario matters more now because the hardening market is increasing both the adjustment volume and the financial consequence of adverse adjustments. A scenario that was benign when adjustments were small and infrequent may become adverse when adjustments are larger and more frequent, and the board that does not run the scenario in the current market does not know whether the portfolio's pricing governance is still adequate.

The second reason is the board's governance responsibility: the board approves a combined-ratio target and a minimum ROE, and the board must be able to assess whether the portfolio's actual pricing—which includes the expert adjustments—can deliver those targets under adverse adjustment assumptions. The enterprise risk framework requires the board to stress-test the assumptions that drive the portfolio's profitability.

The third reason is the regulatory expectation that the board governs the enterprise's pricing risk. A regulator reviewing the board's governance will expect the board to have stress-tested the pricing assumptions, and the adjustment scenario is a direct test of the pricing-governance framework. The solvency relief that reinsurance provides depends on the pricing governance being robust.

What goes wrong when the board does not run the adjustment scenario?

When the board does not run the adjustment scenario, the board does not know whether the adjustment volume is a material risk, the governance framework is not stress-tested, the CUO's adjustment governance is not independently assessed, the board's risk-appetite decision is based on an unverified assumption, and the discovery that adjustments were material is made after the loss experience reveals it.

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What do board members and risk committee chairs actually need from the adjustment scenario?

Board members need the scenario parameters, the base case and adverse case results, the impact on the key financial metrics, and a governance recommendation.

Aditya is the chair of the board's risk committee. The CUO reported that the adjustment volume had been increasing, and the committee asked: what is the financial impact if those adjustments prove to have been unnecessary? The CUO could not answer. Aditya directed the CFO to produce the adjustment scenario: the base case at the current adjustment pattern and the adverse case at a higher rate. The adverse case showed a two-point combined-ratio impact that would breach the board's tolerance. The board directed the CUO to strengthen the adjustment governance.

That is what every board should be directing: run the scenario that tells us whether our adjustment governance is adequate.

• A scenario analysis directed by the board, with defined parameters and a timeline.
• A base-case scenario using the current adjustment rate, magnitude, and accuracy.
• An adverse-case scenario with a higher rate and adverse accuracy.
• The impact on the combined ratio, ROE, and earnings under each scenario.
• A comparison of the adverse-case impact to the board's combined-ratio tolerance and minimum ROE.
• A governance recommendation: if the adverse case breaches the tolerance, what governance strengthening is required.
• A board review of the scenario results and a decision on the governance recommendation.
• A regulatory-readiness demonstration that the board has stress-tested the pricing assumptions.
• An annual update of the scenario parameters to reflect the current adjustment pattern.
• Integration of the scenario into the ORSA process as a pricing-risk stress test.

How can boards build the adjustment-scenario capability?

The board directs the CUO and CFO to produce the scenario within a defined timeline, reviews the results at the risk committee, and based on the results, directs the strengthening of the adjustment governance if needed.

What does the adjustment scenario deliver in practice?

A board that knows whether the adjustment volume is a material risk, a governance framework that has been stress-tested, and a documented board review that can be demonstrated to regulators.

The broader governance reflection is that every assumption that drives the portfolio's profitability should be stress-tested by the board, and the expert adjustment is an assumption—that the adjusted price will produce the target return—whose validity the scenario tests.

Conclusion

For boards and risk committees, the adjustment scenario is the stress test that reveals whether the portfolio's expert adjustments are a manageable variance or a material risk, and the board that directs the scenario and acts on its results governs the pricing risk that the adjustments create.

Frequently asked questions

What scenario should reinsurance leaders run for unchallenged expert adjustments?

A scenario assuming adjustments are consistently adverse—the technical price was more accurate—and calculating the impact on combined ratio, ROE, and earnings.

How does the scenario test pricing-governance resilience?

It asks: if the adjustments prove unnecessary, what is the financial consequence, and can the governance framework detect and correct it?

What parameters should the scenario vary?

The adjustment rate, magnitude, and accuracy—the proportion of adjustments that prove unjustified when tested.

What is the board's role in the scenario analysis?

Direct the CUO and CFO to produce it, review the results, and direct governance strengthening if the scenario indicates material exposure.

How does the scenario inform the risk-appetite decision?

If a plausible adjustment pattern would breach the board's tolerance, the board must tighten governance or adjust appetite.

What governance question does the scenario answer?

Are the expert adjustments a manageable variance or a material risk the governance framework must control?

How should results be presented to the board?

As a stress-test: base case, adverse case, and the impact on combined ratio, ROE, and earnings.

What action should the board take based on scenario results?

If the adverse case breaches tolerance, direct the CUO to strengthen adjustment governance.

About the author

Hitul Mistry is the Founder of Insurnest, an InsurTech company that engineers end-to-end technology exclusively for the insurance industry serving carriers, TPAs, MGAs, brokers, and reinsurers across India, the UAE, and the US. With more than a decade of insurance domain experience, he has built systems spanning underwriting automation, AI-powered underwriting intelligence, claims management, rating and quoting, broking and agency platforms, and reinsurance automation across Health/GMC, Group Life, Motor, P&C, and Reinsurance. Insurnest doesn't adapt generic software to insurance; it builds from the workflow up.

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