Hurricane Loss Reserving
Presentation by Joseph Boor, FCAS
2006 CLRS
September 13, 2006
Hurricane Loss Reserving

Notable Recent Hurricanes
– 2004 Florida hit by 4 hurricanes
– 2005

Katrina Hits Alabama-Louisiana Coast
– New Orleans

Florida hit by two
– Dennis – Panhandle
– Wilma – Unsung major storm
Hurricane Loss Reserving
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Aftermaths
– 2005

Major reserve adjustments for some Florida
homeowners specialists
– 2006
Insolvency of Poe companies in Florida
 Continuing litigation over wind vs. flood
damage post Katrina
 Rebuilding issues in New Orleans

Hurricane Loss Reserving

Major Actuarial Issues
– Some new cos/new (to storms) actuaries

Not sure how to address hurricanes in
reserving
– Will discuss issues later
– Coverage Issues Create Contingent
Liabilities?

Outside scope of this talk
Hurricane Loss Reserving

Technical Actuarial Issues
– Large number of claims on one accident
date

Distorts accident year pattern
– Processing lags induced by high claims
volume
– Potential for higher severities
– Complex reinsurance programs applicable
Hurricane Loss Reserving

Widely available information
– RAA Catastrophe development patterns

But, at least part of this is direct, not net
– Possibly other similar data
– In a phrase, slim pickings.
Hurricane Loss Reserving

Response of actuaries
– Large Cos

Have data on prior storms & use it.
– Small Cos (& their consultants)
Varies by person
 Some instances of actuaries accepting co
numbers at face value

Hurricane Loss Reserving

What can the small co actuary do?
– Want to present a method
No reliance on external data
 Possible for one or two actuaries to execute
using personal computers

– Have done it myself using
 outdated state government personal
computers and
 Circa 2000 Microsoft Office software
Hurricane Loss Reserving

Basic Concepts
– Develop the direct loss for each storm
Use 2004 data to make LDFs for 2005 storms,
etc.
 Use techniques that solve the special
problems

– Then, reflect reinsurance program
Hurricane Loss Reserving

Direct Loss Reserving Issues
1. All the storm’s claims share a single accident
date
–

June storm needs different 12/31 LDF than
November storm
Different severity than other claims as well
2. Different severities between storms?
3. Potential for payment/reserving lags due to
heavy claims volume
4. Possibility that lags differ storm to storm
Hurricane Loss Reserving
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
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How to solve the problems
No. 1 - All the storm’s claims share a
single accident date
Begin by analyzing data grouped by
hurricane
– Period of development is month (or
week) since the hurricane occurrence
date.
Hurricane Loss Reserving

Analyzing data for each hurricane
– This may initially create a data processing
problem (identifying the claims for each
storm)
but using accident date it is usually not too
hard to get a list of the claim numbers for
each storm- computer data crunching can
then do the rest
 Co. may store PCS cat number in claim
master file

Hurricane Loss Reserving
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
Analyzing data grouped by hurricane
What to analyze? – dollar data elements
–
–
–
–
Paid loss (&DCC)
Paid outside adjuster costs
Incurred loss (&DCC)
Incurred outside adjuster costs
Hurricane Loss Reserving
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
Analyzing data grouped by hurricane
What else to analyze? – count data
elements
– Number of closings (number of times any
claim has been closed-set to zero reserve
– Number of claims reported
– Number of reopenings
– Similar data for the AOE portion
Hurricane Loss Reserving
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

Solving the single occurrence date
problem
Data laid out in last two slides solves
the problem
Paid loss development, etc. is no
longer a triangle
Hurricane Loss Reserving

Loss development, whatever sort, is
no longer based on a triangle
– Series of lines across the page-one for
each hurricane
– I organize alphabetically by storm name

May have short line (for recent storm) in the
middle of long lines
Hurricane Loss Reserving
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Example of
Hurricane
development ‘lines’
Type: Paid Loss
Sample Co.
Mos
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Charley
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
Dennis
$X
$X
$X
$X
$X
$X
$X
$X
Frances
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
Ivan
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
$X
Katrina
$X
$X
$X
$X
$X
$X
$X
Wilma
$X
$X
$X
$X
$X
Hurricane
Hurricane Loss Reserving

Keys to understanding hurricane
development
– Not all hurricanes are alike
For the most part, Rita was weak and had
‘smallish’ claims
 In it’s target areas, Wilma was strong and
generated more expensive claims

Hurricane Loss Reserving
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Reserving problem 2 -difference in
claim severities between storms.
– One dubious benefit of having four
storms in 04 is that had 4 very different
storms w/ very different claim sizes.
– Can compare the paid per closed claim on
those at maturities matching Rita and
Wilma’s 12/05 maturities
Hurricane Loss Reserving
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Reserving problems 3 and 4 Payment/reserving lags and
Differences in lags between storms
– For most carriers, since Wilma was big
and Rita was small, Wilma generated
significantly more processing lag than
Rita.
– Measure this by reporting pattern of
claims and % closed by dev. month.
Hurricane Loss Reserving
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Keys to understanding hurricane
development
– Experience w/some carriers is that many
claims reopen
– In 2004, often too many
Hurricane Loss Reserving
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Dealing with Reopenings
– Have to not just compare % closed to
reported for prior storms at matching
maturies-have to compare the % of
previously closed that have since
reopened.
– No specific formula

Seek best assessment from data
Hurricane Loss Reserving
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Florida-Specific??? Issue – Heavy
Reopenings in 2004.
– Some companies experienced demand
surge/other factors so much that their
initial closing payments might be woefully
inadequate to fix houses- result –
massive reopenings.
– Would it happen with 2005 claims?
Hurricane Loss Reserving
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Analyzing chance of 05 storm
reopenings.
– Key statistic to review#reopenings/#claims closed for Wilma
(at 2 months) vs. major 04 storms at 3
months maturity.
Hurricane Loss Reserving
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Reopening Data
– By-product of the calendar month
processing approach we used was the
number of reopenings and claim closings
in each month
– Closing - any day a claim has $$ activity
and ends with a zero reserve.
– Reopening – any time a claim starts the
day w/a zero reserve but has $$ activity.
Hurricane Loss Reserving
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Issues w/ Reopening Data
– A claim that has a supplemental single
(unreserved) payment made after closing
generates a reopening and a closing on
the same day.
– But, it’s objective.
Hurricane Loss Reserving
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Formulas for key closing and
reopening statistics
– Closed claims at date x = #closings
through x - #reopenings through x
– Most key reopening statistic =
#reopenings through x/#closed through
x
Hurricane Loss Reserving
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Synthesis of development approaches
using prior hurricane data
– Look for prior-developing hurricane that
has best fit

Consider, size, reopenings, etc. to determine
best fit
– Consider using LDF based on that
hurricane’s data.
Hurricane Loss Reserving
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Direct Loss development – footnotes
– All the issues with loss development (tail
development, picking links from data,
etc.) apply.
– May use alternate method – Average
unpaid loss per unclosed claim or average
unpaid loss per future closing – or others.
Hurricane Loss Reserving
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How did we create the data?
– We got extracts of each company’s claims
master file and claims transaction file and
processed using Microsoft Access 2000
(computers obsolete as well) and created
data
– Had over $1 billion in ultimate loss
Hurricane Loss Reserving
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Can you create the data?
– Talked to very, very, large Florida writer

They do similar things with modern Access
and modern computers.
– You very likely have the processing power
to this for your company(s)
– Access has a few quirks, but we did this
with pretty limited expertise.
Hurricane Loss Reserving
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Do you know what data files to ask
for?
– Too much to discuss here.
– Bottom line - We got what we needed
even though the company(s) had to
process it a little to get what we thought
was on the master and transaction files.
Hurricane Loss Reserving
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Have done direct-but why bother with
direct and ceded to get net?
– Why not just triangulate net?
Hurricane Loss Reserving
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As we’ll see, most Florida companies
have extensive excess-of-loss
reinsurance that attaches on even
modest hurricanes
– Once it attaches, development is either
slowed significantly (‘open sliver’) or
halted (full coverage)
– If it becomes exhausted, development
may begin again in earnest.
Hurricane Loss Reserving
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Direct to Net
– The skinny is-you need to estimate the
direct and then apply the reinsurance to
get to the net.
– If you’re near to a limit on coverage,
might be worth stating as a risk of
material averse deviation.
Hurricane Loss Reserving
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Next Issue – Getting to Net – Applying
the Reinsurance Program.
Hurricane Loss Reserving
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Applying the Reinsurance Program
– Most important aspect of applying the
reinsurance program is understanding
how the program works.
– I audit some insurance companies that
actually have a great reinsurance
program- but have great difficulty
describing how the different pieces work.
Hurricane Loss Reserving
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Key Features of Most Small Company
Reinsurance Programs
– Quota Share
– First Layer Excess
– Florida Hurricane Catastrophe Fund
(FHCF)
– High Excess (Beyond Cat Fund)
Hurricane Loss Reserving
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Other Common Treaties
– ‘Sliver’ or ‘Market Excess’ Beside Cat Fund
– Per Risk Excess
Hurricane Loss Reserving
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How the structure works – Quota Share
– Since company is a small, growing company,
workhorse of the program is quota share treaty
– Quota Share will pay x% of all loss and DCC (if
through a separate company, often AOE as
well)- Subject to recovery caps per occurrence
and per treaty year
– the % covered usually applies to losses net of
the cat fund – and maybe net of some other
excess treaties.
Hurricane Loss Reserving
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How the structure works – Cat Fund
– Florida only feature – covers only Florida
losses
– Covers 90% of loss only excess of a perhurricane retention(applicable to loss
only), with max recovery per hurricane.
– Also, adds 5% of loss recovery for LAE

Effectively covers 94.5%= 1.05*90% of loss
only between retention and limit.
Hurricane Loss Reserving
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Digression – a few cat fund details
– Statewide retention and limit multipliers common
to all carriers
– These are multiplied by each carrier’s May- April
premium
– Premium Based on early in period (June 1?)
inforce exposure times cat fund rates by
exposure type
– Can look up common retention and limit
multipliers + company premiums on cat fund
website
Hurricane Loss Reserving
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How the structure works – First Layer
Excess
– Has retention lower than cat fund
– retention and limit usually based on loss
and LAE, not just loss
– Why first layer excess?

Usually, cat fund retention represents too
much risk in relation to cos’ surplus.
Hurricane Loss Reserving
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How the structure works – High Excess
– Usually attaches once cat fund exhausted

If loss only, would attach at cat fund retention
+100*limit/94.5.
– attachment and limit usually based on loss and
LAE, not just loss

May yield complex calculation for attachment
– Why high excess?

Typically, cat fund does not supply enough limit for all
potential storms- cos need more limit.
– May have a tower of several high excess layers
Hurricane Loss Reserving
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How the structure works – ‘Sliver’ or
‘Market’ Covers
– Illustrate by example
– If have

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quota share of 50% (cat fund inuring)
cat fund retention of 100M
a 300M loss+$21M LAE,
– then the company suffers a $100M loss (+LAE
in 1st $100M layer of $7Mish) up to the cat fund
retention
– quota share reduces the net loss and LAE (up to
cat fund retention) to $53.5M
Hurricane Loss Reserving
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Sliver Cover Illustration Continued
– Cat fund covers 94.5% of $200M


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= $189M recovery from cat fund
the remaining $11M +$14M LAE = $25M is unreinsured by
the cat fund
quota share reduces this to $12.5M
– Sliver cover would attach at ‘around’ the cat fund
attachment,

would cover the portion left after the cat fund and the quota
share
– especially the LAE.

Usually, would max at at around cat fund loss max (retention
+(1/.945)*limit)
– Since it covers small %, but acts over the broad range of
loss cat fund covers, it is ‘skinny’ & hence is a ‘sliver’.
Hurricane Loss Reserving
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How the structure works – Per Risk Excess
– Covers the excess of the attachment on an
individual property
– attachment selected in advance applies to all
locations covered.
– This often applies before (inures to the benefit
of) all other reinsurance.
– As yet, not found to be a significant factor in
hurricane reserving
Hurricane Loss Reserving
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Applying the Reinsurance Program to
Direct Loss and LAE
– Hardest thing often getting a clear
description of the program

attachments of each component
– On loss only or loss +LAE basis?
% of loss (or loss+LAE?) component covers
 Limits on coverage

Hurricane Loss Reserving
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Limits on coverage you may see
– per occurrence limit

Excess layers have this naturally, quota share often
does as well
– limit on reinstatements

And were they purchased?
– aggregate limit on recoveries

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quota share-as % of premium
Excess layers may have in lieu of reinstatements
– loss only vs. loss and LAE
Hurricane Loss Reserving
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Limits Continued
– In some treaties (noted in quota shares),
how the limit is calculated may be a little
ambiguous

Be sure you understand whether or not any
issues are there.
Hurricane Loss Reserving
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Unfinished issue - attachments of each
component
– Particular issue with cat fund

Underlying first layer excess, sliver cover, and high
excess programs all cover loss +LAE,
– but must coordinate attachments/limits with cat fund
based on loss only

Cat fund retention and limit not yet known (pre-June
1) when surrounding covers placed.
– This leads to complex method of computing
retentions and limits for other treaties

Good to check it is applied correctly.
Hurricane Loss Reserving
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Understanding how the structure
works – What comes first?
– The last part of understanding the
structure is understanding what other
treaties are to be looked to before each
treaty’s loss is computed...e.g., what
treaties ‘inure to the benefit of’ what
other treaties?
Hurricane Loss Reserving
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How treaties apply
– Per risk excess inures to the benefit of
everything else
– cat fund usually comes next
– high excess, first layer excess, and quota
share may have all kinds of relationships
with each other and cat fund in Florida

You need to just figure out what applies in
your case.
Hurricane Loss Reserving
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Applying the reinsurance
– At this point,


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understand how the reinsurance program applies
understand how the limits, attachments, and order of
applying treaties is set up
In Florida-suggest looking for any program changes
since last year
– Matter of taking


estimated direct loss and LAE and run through the
program
less paid loss and LAE run through the program.
Hurricane Loss Reserving
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Conclusions
– First, thank you for coming
– Next, with planning, you can do this and
do it well.