Risk Integration, Aggregation & Correlation: Domino Effects Chet Szczepanski
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Risk Integration, Aggregation & Correlation: Domino Effects Chet Szczepanski Chief Actuary Pennsylvania Insurance Department Pennsylvania Experience PIC Reliance PHICO Legion SWIF Special Funds Medical Malpractice Pennsylvania Experience PIC: Medical malpractice writer Discounted reserves Reserve deficiencies Downgraded Doctor’s did not care Speed Up in Court Decision RBC caught them! Pennsylvania Experience Reliance Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Heavily leveraged by holding company debt Pennsylvania Experience Reliance (continued) Unicover Reserve deficiencies Downgraded Liquidity, liquidity, liquidity Pennsylvania Experience PHICO Medical malpractice writer Rapid expansion into new markets Reserve deficiencies Downgraded Doctors did not care Liquidity not a problem Pennsylvania Experience Legion Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Downgraded Reserves? Liquidity, liquidity, liquidity Pennsylvania Experience Common Themes: Reserve deficiencies Ratings downgrades Reinsurance Liquidity Q1 Q2 Q3 Liabilities Q4 Q1 Q2 Surplus Q3 Q4 Pennsylvania Experience SWIF Consistently a leading writer of WC in PA Often the leading writer Market share has varied from 5% to 15% (currently about 13%) Dramatic premium growth to almost $500 Million in 1994 then precipitous drop but now on the rise Pennsylvania Experience SWIF SWIF Calendar Year Earned Premium (in Thousands) 500,000 450,000 400,000 350,000 Premium 300,000 250,000 200,000 150,000 100,000 50,000 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Year Pennsylvania Experience SWIF SWIF'S EXPOSURE AND PENNSYLVANIA'S UNEMPLOYMENT RATE (MONTHLY) 1.4000 8.0 7.5 1.2000 7.0 6.5 0.8000 6.0 0.6000 5.5 PA UNEMPLOYMENT RATE EXPOSURE INDEX 1.0000 0.4000 5.0 0.2000 4.5 0.0000 Ja 91 n- 4.0 92 nJa J 3 -9 an J 4 -9 an Ja 95 n- Ja 96 n- 97 n- Ja Ja 98 n- 99 nJa Ja n 0 -0 01 n- Ja MONTHS EXPOSURE INDEX RELATIVE TO JANUARY 1991 PA UNEMPLOYMENT RATE Pennsylvania Experience Medical Malpractice Pennsylvania Insurance Department Summary of Investable Assets Distribution Medical Malpractice Predominating Companies 100% 90% 80% 70% Investments in Affiliates Other Assets 60% Cash & Short Term Assets Real Estate 50% Mortgage Loans Common Stocks 40% Preferred Stocks Bonds 30% 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Pennsylvania Experience Medical Malpractice Pricing implication when expected yields drop from 7% to 4%? P&C Industry Asset Distribution for 2001 P & C Industry Asset Distribution for 2001 2% 2% 5% Bonds 9% Stocks 4% Mortgage Loans on Real Estate 5% Real Estate Cash Other Invested Assets Agents Balances 1% 54% 0% Reinsurance Recoverables Income Tax Recoverables 18% Other Assets P&C Industry Invested Asset Distribution for 2001 P & C Industry Invested Asset Distribution for 2001 1% 0% 6% 4% Bonds 22% Stocks Mortgage Loans on Real Estate Real Estate Cash Other Invested Assets 67% Reinsurance Leverage Reliance Asset Distribution 24% Bonds Stocks Reinsurance Recoverables 6% 70% Reinsurance Leverage Add rating sensitive business Mix in a downgrade $1,000,000,000 or more in Statutory Deposits $500,000,000 in one Stock Liquidity? Reinsurance Leverage P & C Industry Asset Distribution for 2001 2% 2% Reliance Asset Distribution 5% Bonds 9% 24% Stocks 4% Mortgage Loans on Real Estate 5% Real Estate Bonds Cash Stocks Other Invested Assets Reinsurance Recoverables Agents Balances 1% 54% 0% Reinsurance Recoverables Income Tax Recoverables 18% 6% Other Assets 70% Equity Leverage Fund Asset Distribution 5% 45% Equities Bonds Cash 50% Conclusions? Risk elements always exist Some are naturally occurring Some are artificially created Interactions can lead to disastrous results Insight? Risk elements must be identified and managed!
