Pricing Excess and Surplus Lines
(COM-5)
Ronald J. Herrig, FCAS
Markel Corporation
Deerfield, Illinois
What Is
the
Surplus
Lines
Market?
The role of the Surplus Lines
industry is to provide a market
for hard-to-place risks that are
not written by the standard
market.
Why are these risks not written
by the standard market?
1. Distressed
Risks/Markets
2. Unique Risks
3. High-Capacity Risks
Examples of Distressed Risks
•
•
•
•
Newly Incorporated Manufacturer
Newly Practicing Physician
Physician with a History of Drug-Use
Lawyer with Past Disciplinary Problems
Examples of Distressed Markets
• OB/GYNs
• California Contractors
• Nutritional
Supplements
Examples of Unique Risks
• Architectural Project
Policies
• Fireworks Accounts
• Shamu Transportation
Examples of High-Capacity
Risks
• High Rise Buildings
• Directors & Officers
• Aviation
Property/Liability
How Can Surplus Lines
Companies write this
Junk?
By being Fast, Fluid and
Flexible!
Regulation
• Needn’t file
rates/forms
• Insurance company
licensed in state of
domicile only
• Many Responsibilities
passed to the Surplus
Lines Broker
Coverage Limitations
• Claims-Made Coverage
• ALAE included within Limits
• Sublimits
• Custom Endorsements/Exclusions
Responsibilities Handled by
Broker
• Verify Diligent Search
Completed
• Maintain Policy Files
for Audit
• Collect and Remit
Premium Tax
And more importantly…
Expert Underwriting
U/Wers need:
• to understand their
company’s appetite for
risk – and abide by it
• knowledge of book’s
underlying statistics
• to understand each insured
and it’s associated risks
Art, science, experience
Expert Claims Handling
• Smart Claim Handlers
• Standardized
Approach to Claims
Reserving
• Consistent Approach
to Claims Reserving
Effects of the Market on E&S
Hard Market and E&S
1.
Admitted Companies non-renew any
iffy risks.
2.
Surplus Lines Apps increase
dramatically.
3.
S.L. Rates Firm, Coverages Contract.
4.
Small Decrease in Admitted Market
can increase Non-Admitted Market
Substantially.
Change in Applications
(Products 2000 Baseline = 100 units)
300
250
200
2000
2001
2002
2003
2004
150
100
50
0
Products
Med Mal
Soft Market and E&S
1.
Admitted Companies
become less selective in
their Underwriting.
2.
Fewer Risks are
Declined.
3.
E&S companies develop
new products to
maintain volume.
Life Cycle of New Product
1. Coverage unavailable in Standard Market.
2. E&S develops coverage, forms,
exclusions, rates.
3. Rates, Forms change quickly, as needed.
4. Rates, Forms Stabilize – Profit Grows
5. Standard Market offers broader product at
lower rates.
Examples of New Products
• Employment Practices
Liability
• Tenant Discrimination
• Environmental
Impairment Liability
EPLI
(1994 Baseline = 100 units)
45000
40000
35000
30000
25000
E.P. (000)
20000
15000
10000
5000
0
1994
1996
1998
2000
2002
2004
New Product Development
1. Opportunity
identification
2. Product design
3. Testing
4. Product introduction
5. Life-cycle
management
Opportunity Identification
• Broker
Recommendations
• Marketing
• New Product Teams
• Media
Product Design
• Target Market
• Coverages
• Policy Wording
• Rating
Testing
• Beta-Test on Select
Market
• Honest Feedback
• Rate, rate, rate
Ratemaking Methods
Pure Premium Method
Treatment of Losses
1. Trend individual ‘ground-up’ losses;
remove base deductible
2. Develop losses; cap at basic limit
3. Aggregate all adjusted losses.
Pure Premium Method
Treatment of Exposures
1. Multiply individual units of exposure by
applicable relativity factors (state, class
code, claims-made step-rate, etc.)
2. Aggregate all adjusted exposures
Pure Premium Method
Calculation of Rate
Pure Premium =
Aggregate Adjusted Losses
Aggregate Adjusted Exposures
Base Rate = Pure Premium
Permissible L/R
Pure Premium Method
• Works well for an existing product
• Works best for a product with a welldefined exposure base (doctors, employees)
• Requires detailed loss and exposure info
(claim-by-claim, policy-by-policy)
• Actuarially sound
Piggy-back Method
1. Start with Comparative Product
2. Adjust Rates for Coverage
differences
3. Adjust for Limits/Deductible
differences
4. Adjust for Expense differences
5. Others?
Piggy-back Method
• Works well for Enhancement of Existing
Product
• Requires knowledge of Comparable Product
• Judgmental
• Danger of being too
Conservative/Aggressive?
• Difficult to Support to Others
The Festus Method
The Festus Method
Ratemaking Tools
• Imagination!
• Intuition!
• Internet!
Useful Sites
• www.google.com
• www.firstgov.gov - U.S. Government’s
Official Web Portal
• www.bls.gov - Bureau of Labor Statistics
• www.federalreserve.gov - Interest Rates
Other Useful Websites
•
•
•
•
www.cas.org
www.cnn.com
www.espn.com
www.imdb.com