Advanced
Property
Ratemaking
Sean Devlin
CARe Meeting
June 6-7, 2005
Agenda
Audience Pre-requisites
 Pro Rata/ELR determination
 Primary “Price”
 Experience Rating
 Exposure Rating
 Weighting of Methods
 Conversion of Loss Cost to Pricing
 Summary and Questions

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GE Insurance Solutions
June 6-7, 2005
What Do I Assume You Know?
 Basic Property Insurance/Reinsurance Knowledge
 TIV and its components
 Primary ratemaking for property (CAS Exams)
 Coverage forms
 Routine reinsurance contract terms
 Cat modeling basics
 The vendor models
 See my other presentation for further information
Yes, a shameless plug
 Use multiple models for each account
 Basic exposure and experience rating
 Steve will “deep dive” into exposure rating
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GE Insurance Solutions
June 6-7, 2005
ELR Determination
Foundation of Exposure Rating
Which ELR to use?
 Must match your curve in exposure rating
 Preference: Eliminate cat as much as possible
 Options for ELR:
• Full LR
• No cat whatsoever
• Exclude certain cats
Methodology
 Equivalent to primary ratemaking, except
 Need for factors to back out certain cats to match
exposure curve, if the match isn’t already made
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June 6-7, 2005
Pro Rata Ratemaking
Determining your ELR
 Breakout components
 Basic LR – very stable small, non-cat events
 Risk LR – losses subject to a per risk Layer
• Breakout into layers, like per risk rating
• Appropriate blend of experience & exposure
 Small Cat LR(s) – experience rate vs. model
 Modeled Cats
 Why breakout?
 Inuring reinsurance or contract features
 Understand the drivers of the ELR
 Appropriate targets for quoting business
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GE Insurance Solutions
June 6-7, 2005
Pro Rata Ratemaking
Determining your Target Loss Ratio
Loss Ratio Loading
30.0%
2.5%
10.0%
2.0%
10.0%
2.0%
2.0%
0.5%
5.0%
5.0%
30.0%
0.0%
87.0%
12.0%
Total
32.5%
12.0%
12.0%
2.5%
10.0%
30.0%
99.0%
Example/Comments
First 100K per risk
unl xs 100k per risk
Thunderstorm/Tordano/Hail
Winterstorm/Wildfire
Hurricane/EQ
Could be negative load for slide
Total Should be less than 100%
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GE Insurance Solutions
June 6-7, 2005
Pro Rata Ratemaking
(Cont’d)
Cat Losses
Hurricane losses (RMS WS)
 Earthquake
 Fire Following
 Winterstorm
 Wildfire
 Extratropical wind
 Terrorism
 Other – what could happen?
 Further details – see my other presentation
Shameless plug #2
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GE Insurance Solutions
June 6-7, 2005
Pro Rata Ratemaking
(Cont’d)
Trend Parameters
 Cost of contracting labor
 Size of homes increasing
 Deductible impacts on frequency and severity
 Data – shifts in and out of E&S market
 Excess business
 Non-standard classes
 Demand surge
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GE Insurance Solutions
June 6-7, 2005
Pro Rata Ratemaking
(Cont’d)
 Final Rating
 Determine loss distribution – convolute or simulate
 Lognormal – for parts
 Large loss component - optional
 Cat should be different distribution
• use vendor output
• “curve” for other cat losses
 Apply contract terms – READ THE SLIP
 This is very important for various reasons:
 Loss sensitive features
 Caps on per risk/per occurrence
 Knowing your upside vs. downside
 Some ROE/RORAC models depend on this
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June 6-7, 2005
Pro Rata Ratemaking
(Cont’d)
Special Considerations
 Pro Rata on XS
 Consider effect of leveraged trends
 Effect estimated by applying loss distribution
 Distribution can be actual data or approximate
 Losses develop slower
 Rate change is difficult to monitor
 More cyclical than other lines
 Parameters applied on subject business, not all
 Important for surplus – typically not split out
 Know what business is in the price monitoring
 Watch for shifts in segments
 Split up in homogenous groups to remove bias
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June 6-7, 2005
Note on Primary “Price”
Price Monitoring Reports
 Typically created to measure price lift circa 2000
 Know what is (isn’t) captured
 Filed rate changes
 Schedule modification factors
 Experience modification factors
 SIR/Limit
 Terms and conditions
 New business
 Test for bias
 Trend or shift in adjusted loss ratios
 Discuss with client changes
 More important for high capacity eaters
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GE Insurance Solutions
June 6-7, 2005
Note on Primary “Price”
Effect of missing uncaptured price
 Typically underestimated the magnitude of change
 Softening Cycle:
 Underestimating decreased rates
 Underestimating reserves
 Calendar year results lag true results
 Delays recognition of results
 Softening prolonged– damage is slowly realized
 Hardening Cycle:
 Underestimating increased rates
 Overestimating reserves
 Calendar year results lag true results
 Delays recognition of results
 Hardening prolonged– success is slowly realized
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June 6-7, 2005
Primary “Price”
(cont’d)
Index
Rate Adequacy Over Time
Regional
Specialty
National
Time
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June 6-7, 2005
Primary “Price”
(cont’d)
True Price vs Captured Price
Index
“Uncaptured
Rate” change
Price Monitor
Actual Price
Time
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June 6-7, 2005
Primary “Price”
(cont’d)
Price Assumption Effects on Cal Yr Results
Actual peak
of soft market
Calendar Year results
understated during soft
market
Loss Ratio
Should be
hardening
here
Plan
Actual
Cal Yr
Time/Year
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June 6-7, 2005
Experience Rating
Premium Side
 Same as pro rata, mostly
 Splitting up business into exposed and not exposed
 In split business, parameters may be different
 Exiting class? Reflect all premium affected if excl.
Loss Side
 Capping at policy limits – TIV and loss both trend
 Losses should be on same basis as exposure rating
 Reflective of per risk definition – READ the slip
 Two methods to calculate burning cost
 Empirical - weighted
 Fit distribution
 Split quoted layers into sub layers to add credibility
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GE Insurance Solutions
June 6-7, 2005
Exposure Rating (cont’d)
General Considerations
 ELR must reflect the data underlying loss curve
 What curve to use
 PSOLD – becoming a standard
 Lloyd’s curve
• Reversals exist
• A premium calculator for facultative
 Ludwig curves – outdated
 Other company curves – basis unknown
 Understanding of the data and assumptions is key
 Understand the basis for companies profiles
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GE Insurance Solutions
June 6-7, 2005
Exposure Rating (cont’d)
What is in the companies profile?
 Limits – don’t assume, ask if unsure
 Business interruption and/or contents included?
 Policy limit
 Location limit
 PML
 MFL
 Key location
 Limits or values for layered business
 ITV issues
 Other coverages
 Excess policies
 Subscription business
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GE Insurance Solutions
June 6-7, 2005
Exposure Rating (cont’d)
What is in the companies profile (cont’d)?
 Any perils excluded?
 Homeowners
 Form (HO-2,3,4,5,6)
 Coverage A only or all coverages
 Farmowners
 Multiple diverse buildings on a farm
 One TIV
 Smell test for reasonability, especially:
 Order of magnitude of some TIV
 Premium allocation
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GE Insurance Solutions
June 6-7, 2005
Exposure Rating
(cont’d)
PSOLD
 Data from 1992-2002
 Can separate business by
 Occupancy – 22 groups, diff. strongest btw.
• Manufacturing
• Non-manufacturing
• HPR
• Little differences between groups
 State – not a big driver
 Include/Exclude Cats >$100M industry loss
 Include/Exclude WTC
 Include/Exclude Business Interruption
 Based on 1.8M occurrences, after scrubbing
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GE Insurance Solutions
June 6-7, 2005
Exposure Rating
(cont’d)
Issues With PSOLD
 Not all segments represented evenly by PSOLD
 Loss history is thin for some groups
 Losses above $5M in the database are thin
 # of losses > $5M is
 # of losses > $10M is
 Refer to a list of large industry losses for more input
 Blanket policies small amount of database
 US business only – applicable abroad?
 HO – US homes are built out of “cardboard”
 Factory in US similar to one in UK?
 Main street business in US same as France?
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GE Insurance Solutions
June 6-7, 2005
Exposure Rating
(cont’d)
Don’t Trust the Black Box
 Check the output for reasonability
 Contract Match:
 Definition of risk
• One Building (possibly less)
• Multiple Buildings at one location
• Entire Policy
• Company has sole determination
 Exposure profiles
 Loss curve
 Dual trigger contracts – cat and risk combined
 Scope of coverage
 READ THE SLIP
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GE Insurance Solutions
June 6-7, 2005
Weighting of Methods
General Considerations
 Actual vs. Expected counts to layer (significant)
 Actual – Needs to be adjusted for volume
 Severity differences – may need to subdivide layer
 Make sure that both methods reflect the same risk
 No loss = no weight to experience? Not necessarily
 Deficiencies in exposure data or curves
 Past experience indicative of future
 Do not be afraid of splitting quoted layer into parts
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June 6-7, 2005
Conversion to Pricing
General Considerations
 Create loss distribution – even if “not needed”
 Adjust for treaty features – AAD, swing rate, etc.
 Understand upside and downside of deal
 “Unpriced” capacity – blown limit, cat on tail of curve
 Is the rate on line appropriate
 “Red Zone” catastrophe utilization
 Treaty correlation to book
 Layered/Subscription business
 Catastrophes
 Soft Factors
 Check yourself for naive capital – cheap cat cover
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June 6-7, 2005
Key Takeaways
 Understand the data inputs
 Understand your models and parameters
 Understand strength and weakness of the models
 Proper match to treaty terms – READ THE SLIP
 Reflect true primary price
 Rate for everything
 Include the untested exposure
 Work with your underwriter
 Question everything – Assume nothing at face value
THINK - Don’t Just Go Through The Motions
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GE Insurance Solutions
June 6-7, 2005