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