Post on 31-Dec-2015
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INTRODUCTION TO REINSURANCE EXPERIENCE & EXPOSURE RATING
UNDERWRITING INFORMATION
MICHAEL E. ANGELINA - TOWERS PERRIN
ROBIN MURRAY – TOWERS PERRIN
CAS RATEMAKING SEMINAR
MARCH 11, 2004
PHILADELPHIA, PA
AGENDA
Introduction Description of Sessions Background Information
Exposure Rating Direct vs Ceded Loss Ratio Treatment of ALAE
Experience Rating Burning Cost Frequency / Severity
Recap Audience Underwriting Reconciliation of Estimates Concluding Remarks
BACKGROUND INFORMATION
Placement Terms for Subject Business Layer: 100K xs 100K Loss Occurring Policy;Effective 1-1-04 Subject Premium $40 million
was $10 million - 6 years ago
Other Information - Quantitative Historical on-level earned premium for company Limits distribution/line of business profile Classes of risk (mostly Table 2 Prem/Ops) Schedule P - loss ratios, direct, ceded, net Listing of large losses (40 > $30,000)
Histories included with large claims Historical loss development of ground-up losses
BACKGROUND INFORMATION
On-Level Premium
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1998 1999 2000 2001 2002
Accident Year
Dir
ect
Ear
ned
Pre
miu
m
Earned Premium On-level Adjustment
Estimation PitfallsEffect of Policy Limit Drift on Prior Experience
Distribution of DEP by Policy Limit
0%
20%
40%
60%
80%
100%
1998 1999 2000 2001 2002
Accident Year
Perc
enta
ge o
f Direc
t Ea
rned
Pre
miu
m
100k 300k 500k 1 million
BACKGROUND INFORMATION
Distribution of 2002 Accident Year Direct Earned Premium by Prem/Ops Table
9%
84%
7%
Table 1 Table 2 Table 3
BACKGROUND INFORMATION
Direct Ultimate Loss and ALAE Ratio Other Liability Line of Business
0%
10%
20%
30%
40%
50%
1998 1999 2000 2001 2002
Direct Ceded Net
* Ultimate Loss & ALAE as reported in Schedule P
BACKGROUND INFORMATIONObservations on Data
Significant growth over experience period controlled growth or take-all-comers expansion of current relationships with known agents
introduced new producers
Appearance of underlying policy limit drift less than 50% of business had policy limits 500k and above
2003 percentage is 64% anticipated 2002 to 2003 saw more migration to higher limits
Strong u/w results for other liability lines of business 35% to 40% on direct business 38% to 43% on net business
Signs of development at later maturities age-to-age factor of 2.78 for 33-45 month
BACKGROUND INFORMATION
Other Information - Qualitative Underwriting audits
Excess and surplus company large writer of retail supermarkets in Northeast
Underwriting philosophy generally strong Surcharge tougher risks Generally knowledgeable about territories
Loss ratios have been stable by accident year Claims audit
Reserving philosophy - development on large claims across all maturities
Settlement philosophy Higher-than-average expenses
Introduction toExposure Rating
Why Exposure Rate? determines benchmark incorporates changes in underlying risks
reflects distribution of policy limits distinguishes risk profiles/classes
provides estimate where losses are sparse eliminates issue of free cover
reflects underlying loss experience somewhat; may not reflect excess experience
illustrates frequency and severity components exposure curves produce average severity
implies certain frequency
Exposure RatingMethodology
Distribute total premium to corresponding policy limits and lines of business provided with premium distribution allocation of premium to future year is critical assumption
Calculate amount of premium exposed to reinsurance layer excess loss factor / increased limits factor
reflects line of business and underlying policy limit
Convert “exposed premium” to “exposed losses” by line of business
Consider other factors ALAE; Risk Loads; ECO/XPL
Distribution of Premium to Layer
Premium Distribution by Policy Limit:
Limit Premium Retention 100 Xs100 Xs 200
100/100 7,000 7,000 0 0
300/300 8,520 6,842 1,066 612
500/500 10,000 7,379 1,150 1,471
1000/1000 14,480 9,641 1,502 3,336
40,000 30,862 3,717 5,420
NOTE: All values in thousands
Distribution of Premium and Expected Loss to Layer: Policy Limit $500/$500
Premium Loss
Layer Distribution Distribution
0-100 73.8% 67.8%
100-200 11.5% 14.7%
Above 200 14.7% 17.5%
Allocation of Premium & Loss to Layer
Limit Retention 100 Xs100 Xs200 Total
100/100 Premium 7,000 0 0 7,000
Loss 2,800 0 0 2,800
300/300 Premium 6,842 1,065 612 8,520
Loss 2,551 552 304 3,408
500/500 Premium 7,379 1,150 1,472 10,000
Loss 2,714 588 698 4,000
1000/1000 Premium 9,641 1,502 3,336 14,480
Loss 3,537 766 1,485 5,792
Total Premium 30,862 3,717 5,421 40,000
Loss 11,602 1,907 2,490 16,000
ALAE by Layer
Retention 100 Xs100 Xs200 Total
Premium 30,862 3,717 5,421 40,000
Exp Loss 11,603 1,907 2,490 16,000
ALAE% 42.9% 20.9% 18.6% 36.6%
ALAE 4,988 398 465 5,851
Loss&ALAE 16,591 2,304 2,956 21,851
L&LAE Ratio 53.8% 62.0% 54.5% 54.6%
ALAE Load Can Vary
By layer
Model with two way variability Load % decreases by limit ALAE is then allocated to layers
One allocation formula for Pro Rata A more complicated one for Added To