Advanced Property Ratemaking Sean Devlin CARe Meeting June 6-7, 2005.

Advanced PropertyRatemaking

Sean DevlinCARe MeetingJune 6-7, 2005

2GE Insurance Solutions

June 6-7, 2005

Agenda Audience Pre-requisites Pro Rata/ELR determination Primary “Price” Experience Rating Exposure Rating Weighting of Methods Conversion of Loss Cost to Pricing Summary and Questions


June 6-7, 2005

What Do I Assume You Know? Basic Property Insurance/Reinsurance Knowledge

TIV and its components Primary ratemaking for property (CAS Exams) Coverage forms Routine reinsurance contract terms

Cat modeling basics The vendor models See my other presentation for further information

Yes, a shameless plug Use multiple models for each account

Basic exposure and experience rating Steve will “deep dive” into exposure rating


June 6-7, 2005

ELR DeterminationFoundation of Exposure Rating

Which ELR to use? Must match your curve in exposure rating Preference: Eliminate cat as much as possible Options for ELR:

• Full LR• No cat whatsoever• Exclude certain cats

Methodology Equivalent to primary ratemaking, except Need for factors to back out certain cats to match exposure curve, if the match isn’t already made


June 6-7, 2005

Pro Rata RatemakingDetermining your ELR

Breakout components Basic LR – very stable small, non-cat events Risk LR – losses subject to a per risk Layer

• Breakout into layers, like per risk rating• Appropriate blend of experience & exposure

Small Cat LR(s) – experience rate vs. model Modeled Cats

Why breakout? Inuring reinsurance or contract features Understand the drivers of the ELR Appropriate targets for quoting business


June 6-7, 2005

Pro Rata RatemakingDetermining your Target Loss Ratio

Loss Ratio Loading Total Example/Comments30.0% 2.5% 32.5% First 100K per risk10.0% 2.0% 12.0% unl xs 100k per risk10.0% 2.0% 12.0% Thunderstorm/Tordano/Hail2.0% 0.5% 2.5% Winterstorm/Wildfire5.0% 5.0% 10.0% Hurricane/EQ

30.0% 0.0% 30.0% Could be negative load for slide87.0% 12.0% 99.0% Total Should be less than 100%


June 6-7, 2005

Pro Rata Ratemaking (Cont’d)

Cat LossesHurricane losses (RMS WS)

Earthquake Fire Following Winterstorm Wildfire Extratropical wind Terrorism Other – what could happen?

Further details – see my other presentationShameless plug #2


June 6-7, 2005


Trend Parameters Cost of contracting labor Size of homes increasing Deductible impacts on frequency and severity Data – shifts in and out of E&S market Excess business Non-standard classes Demand surge


June 6-7, 2005


Final Rating Determine loss distribution – convolute or simulate

Lognormal – for parts Large loss component - optional Cat should be different distribution

• use vendor output• “curve” for other cat losses

Apply contract terms – READ THE SLIP This is very important for various reasons:

Loss sensitive features Caps on per risk/per occurrence Knowing your upside vs. downside Some ROE/RORAC models depend on this


June 6-7, 2005


Special Considerations Pro Rata on XS

Consider effect of leveraged trends Effect estimated by applying loss distribution Distribution can be actual data or approximate Losses develop slower Rate change is difficult to monitor More cyclical than other lines

Parameters applied on subject business, not all Important for surplus – typically not split out Know what business is in the price monitoring

Watch for shifts in segments Split up in homogenous groups to remove bias


June 6-7, 2005

Note on Primary “Price” Price Monitoring Reports

Typically created to measure price lift circa 2000 Know what is (isn’t) captured

Filed rate changes Schedule modification factors Experience modification factors SIR/Limit Terms and conditions New business

Test for bias Trend or shift in adjusted loss ratios Discuss with client changes More important for high capacity eaters


June 6-7, 2005

Note on Primary “Price” Effect of missing uncaptured price

Typically underestimated the magnitude of change Softening Cycle:

Underestimating decreased rates Underestimating reserves Calendar year results lag true results Delays recognition of results Softening prolonged– damage is slowly realized

Hardening Cycle: Underestimating increased rates Overestimating reserves Calendar year results lag true results Delays recognition of results Hardening prolonged– success is slowly realized


June 6-7, 2005

Primary “Price” (cont’d)

Rate Adequacy Over Time

Time

Ind

ex

Regional

Specialty

National


June 6-7, 2005

Primary “Price” (cont’d)

True Price vs Captured Price

Time

Ind

ex

Price Monitor

Actual Price

“Uncaptured Rate” change


June 6-7, 2005

Primary “Price” (cont’d)Price Assumption Effects on Cal Yr Results

Time/Year

Lo

ss R

ati

o

Plan

Actual

Cal Yr

Calendar Year results understated during soft market

Actual peak of soft market

Should be hardening here


June 6-7, 2005

Experience Rating Premium Side

Same as pro rata, mostly Splitting up business into exposed and not exposed In split business, parameters may be different Exiting class? Reflect all premium affected if excl.

Loss Side Capping at policy limits – TIV and loss both trend Losses should be on same basis as exposure rating Reflective of per risk definition – READ the slip Two methods to calculate burning cost

Empirical - weighted Fit distribution

Split quoted layers into sub layers to add credibility


June 6-7, 2005

Exposure Rating (cont’d)

General Considerations ELR must reflect the data underlying loss curve What curve to use

PSOLD – becoming a standard Lloyd’s curve

• Reversals exist• A premium calculator for facultative

Ludwig curves – outdated Other company curves – basis unknown Understanding of the data and assumptions is key

Understand the basis for companies profiles


June 6-7, 2005


What is in the companies profile? Limits – don’t assume, ask if unsure

Business interruption and/or contents included? Policy limit Location limit PML MFL Key location Limits or values for layered business ITV issues

Other coverages Excess policies Subscription business


June 6-7, 2005


What is in the companies profile (cont’d)? Any perils excluded? Homeowners

Form (HO-2,3,4,5,6) Coverage A only or all coverages

Farmowners Multiple diverse buildings on a farm One TIV

Smell test for reasonability, especially: Order of magnitude of some TIV Premium allocation


June 6-7, 2005


PSOLD Data from 1992-2002 Can separate business by

Occupancy – 22 groups, diff. strongest btw.• Manufacturing• Non-manufacturing• HPR• Little differences between groups

State – not a big driver Include/Exclude Cats >$100M industry loss Include/Exclude WTC Include/Exclude Business Interruption

Based on 1.8M occurrences, after scrubbing


June 6-7, 2005


Issues With PSOLD Not all segments represented evenly by PSOLD Loss history is thin for some groups Losses above $5M in the database are thin

# of losses > $5M is # of losses > $10M is

Refer to a list of large industry losses for more input Blanket policies small amount of database US business only – applicable abroad?

HO – US homes are built out of “cardboard” Factory in US similar to one in UK? Main street business in US same as France?


June 6-7, 2005


Don’t Trust the Black Box Check the output for reasonability Contract Match:

Definition of risk• One Building (possibly less)• Multiple Buildings at one location• Entire Policy• Company has sole determination

Exposure profiles Loss curve Dual trigger contracts – cat and risk combined Scope of coverage

READ THE SLIP


June 6-7, 2005

Weighting of MethodsGeneral Considerations

Actual vs. Expected counts to layer (significant) Actual – Needs to be adjusted for volume Severity differences – may need to subdivide layer Make sure that both methods reflect the same risk No loss = no weight to experience? Not necessarily Deficiencies in exposure data or curves Past experience indicative of future Do not be afraid of splitting quoted layer into parts


June 6-7, 2005

Conversion to PricingGeneral Considerations

Create loss distribution – even if “not needed” Adjust for treaty features – AAD, swing rate, etc. Understand upside and downside of deal “Unpriced” capacity – blown limit, cat on tail of curve Is the rate on line appropriate “Red Zone” catastrophe utilization Treaty correlation to book

Layered/Subscription business Catastrophes

Soft Factors Check yourself for naive capital – cheap cat cover


June 6-7, 2005

Key Takeaways

Understand the data inputs Understand your models and parameters Understand strength and weakness of the models Proper match to treaty terms – READ THE SLIP Reflect true primary price Rate for everything Include the untested exposure Work with your underwriter Question everything – Assume nothing at face value

THINK - Don’t Just Go Through The Motions

Advanced Property Ratemaking Sean Devlin CARe Meeting June 6-7, 2005.

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