Introduction to
Exposure and Experience Pricing Methods
A Case Study
John Buchanan
CAS Ratemaking Seminar – REI 3
March 17, 2008
CAS RM 2008 – Introduction to Exposure and Experience
1
Agenda
• Introduction to Case Study (5 mins – John)
– Reinsurance Proposal
– Pricing Information Received
• Exposure Rating (30 mins – Halina)
– Basics of Method
– Indications
• Experience Rating (30 mins – Kyle)
– Basics of Method
– Indications
• Comparison of Results (10 mins – John)
– Next Steps
– Experience vs. Exposure and Underwriting Cycle
• Questions
2
Reinsurance Proposal
• Layer $100,000 xs $100,000
• Estimated Premium: $40,000,000
– Rapid growth recently
– Was $10,000,000 six years ago
– Large apparent rate increases
• GL Business
– Southeast US
• Underwriting
– Business has been sold a few times during 10 year history to
different fronting carriers
– Latest sold two years ago
3
Pricing Information Received
• Premiums
– by Class Code
– by Policy Limit
• Historical loss ratios
• Claim listings
– Reporting threshold of $50,000
– Current evaluation
– Histories
• Claims
– Reserve stair-stepping
– Higher than average expenses
4
Exposure and Experience Pricing
• Presentations…
5
What’s your final answer?
• Experience for this layer is half of
the exposure
• Exposure = 3.92% (1.57 mm)
• Experience = 1.85% (0.74 mm)
• Trick Question…
– More investigation needed
6
Exposure Pricing
Indicated
Exposure Burn
(%)
Layer
125,000
100,000
350,000
300,000
xs
xs
xs
xs
75,000
100,000
150,000
200,000
6.59%
3.92%
3.19%
2.00%
Exposure Method
Benchmark
Indicated
Excess Claim
Ultimate Loss
(USD)
Counts
2,636,000
1,568,000
1,276,000
800,000
23.47
20.26
5.61
4.10
Benchmark
Severity
112,292
77,406
227,500
195,000
• Don’t just look at layer you are pricing (100 xs 100k)
• Look at layers below and above as well
• Look at Exposure burns and claim counts
7
Experience Pricing
Layer
125,000
100,000
350,000
300,000
xs
xs
xs
xs
75,000
100,000
150,000
200,000
Experience - Traditional Burning Cost Method
Indicated
Indicated
Indicated
Implied
Ultimate Loss
Indicated
Experience
Excess Claim
(USD)
Severity
Burn (%)
Counts
2.86%
1,144,422
10.19
112,292
1.85%
741,067
9.57
77,406
2.75%
1,101,180
6.18
178,281
1.92%
768,718
5.56
138,284
• Ditto for Experience Pricing
• Use same layers for easier comparison
8
Exposure and Experience
Comparison
# of Excess Claims
25.0
23.5
20.3
Exposure
Experience -BC
20.0
15.0
10.2
10.0
9.6
5.6 6.2
5.0
4.1
5.6
0.0
75,000
•
•
•
100,000
150,000
Attachment Point
200,000
In this case study, there is an inconsistent relationship as move
up the attachment points
While the low layer experience is about half of exposure, the
upper layers are about equal to exposure
Need more investigation to reconcile and help solve the puzzle
(next session – REI4)
9
Traditional Methods Recap
Experience
• Relevant parameter
defaults/overrides for:
– LDFs (excess layers)
– Trends (severity, frequency,
exposure)
– Rate changes
– LOB/Hazard Grp indicators
• Adjust for historical
changes in:
– Policy limits
– Exposure differences
o Careful “as-if”
Exposure
• Relevant parameters
defaults/overrides for:
–
–
–
–
ILFs (or ELFs, PropSOLD)
Direct loss ratios (on-level)
ALAE loads
Policy profile (LOB, HzdGrp)
o Limit/subLOB allocations
• Adjust for expected
changes in:
– Rating year policy limits
– Rating year exposures
expected to be written
10
Underwriting Cycle - AY
11
Underwriting Cycle – AY vs. CY
12