How Actuaries Influence the Art and Science of Underwriting

1. How Actuaries Influence the Art and Science of Underwriting

2. How Actuaries Influence the Art and Science of Underwriting MODERATOR: Jeffrey P. Klenk, Senior Vice President Travelers Bond & Financial Products PANELISTS: William A. Dougherty, CIC, RPLU, Insurance Broker Kenneth J. Hoppe MBA, FCAS, Vice President & Actuary, HudsonInsurance Group Stephen Meyer, FCAS, MAAA, Senior Vice President & Actuary,Max Bermuda Dale Vincent Jr., FCAS, MAAA, Executive Vice President, Specialty Casualty, Arch Reinsurance Co.

3. Primary Rate Making • Manual Rating • Exposures to be insured • Average for the class • Unique characteristics that could influence losses • Individual Account Pricing • Experience rating applied to small and medium accounts • Loss rating applied to large accounts • Price Change Monitoring • Measure exposure adjusted rate changes • Measure average deviations from manual

4. Primary Rate MakingInteraction with Underwriters • Discussion of Exposure • Exposures • Exposure growth • Claims made step factors vs. occurrence • Discussion of Losses and Trends • Loss development • Frequency and severity • Capping of large losses • Discussion of Optimal Limits and Retentions • Limits and retention options • Discussion of Risk Factors, Assumptions, and Pricing Ranges • Expenses, profit, risk load

5. Excess Rate Making What Reinsurance Actuaries Do With Themselves All Day • Analyze Reinsurance Submissions • Burn rating • Exposure rating • Establish base rates • Rating plan comparisons • Increased Limits and Trend Analyses • Work with Primary and Captive Insurers • Try to talk physician insurers out of giving claims free credits! • Audits • Track Aggregate Rate Changes • Reserving

6. Underwriter & Actuary Interaction:Actuary’s View • Ensure Communication Among Actuarial and Underwriting • Assess Comprehension Between Actuarial and Underwriting • Evaluate Relevance of Provided Underwriting Informationto Risk • Question Completeness of Underwriting Information • Promote Fairness of Fight • Avoid Winner’s Curse • Look Forward • Read Policies and Contracts • Be Cynical

7. Underwriter & Actuary Interaction:Underwriter’s View • Roles and Responsibilities • Portfolio vs. account specific • Role of broker/insured for large accounts • Relation Between Actuary and Underwriter • Who really prices risk? • Impact of pricing models on underwriting decisions • The Art of Underwriting • Risk selection, scope of coverage

8. Case Study Physician • Description • Primary Physician Group Practice Pricing • Territory: Los Angeles, CA • Coverage • Limits: $1M/$3M per physician with no separate entity coverage • Retention: $250,000 SIR each loss, each physician. LAE pro rata to loss • Claims handling: company • Exposures (# of physicians) • No surgery 97 • Minor surgery 21 • Surgery 9 • OB/gyn 13 • Miscellaneous 10 Total150 • Assumptions • Historical exposures consistent with current exposure levels

9. Case Study PhysicianLoss History Evaluated at 6/30/2008

10. Case Study Hospital • Description • Primary Hospital • Territory: Connecticut • Coverage • Limits: $1M/$3M • Retention: None • Claims Handling: Company • Exposures • Assumptions • No exposure history • No narrative on large losses

11. Case Study HospitalLoss History Evaluated at 6/30/2008

12. Case Study HospitalObservations & Pricing • Complete Data not Provided. “Reasonable” Assumptions Tend Towards Being Somewhat Conservative (Though Not “Unreasonably”, Of Course) • Both Number and Incurred Dollars Less Than Expected • Ratio of Ale to Loss is Also Very Low • Hospital has a Lot of Births and Surgeries For its Size. Pricing Then is Dependent Upon Weight Given to Procedures • Loss or “Actuarial” Rating Assumptions: • Trended severity at 6% • Capped losses at $250,000 and $500,000 • Assumed case reserves were fairly weak • Assumed exposure growth of 5% per year • Used price target of 65% loss and ALE ratio because that is what was promised the reinsurers. • Do not want to be more aggressive on an account where there is so much data missing • Manual Rating: Indicated premium is $1,500,000. • Indicated Premiums of $1,050,000 to $1,150,000. • Selection: $1,200,000.

13. Case Study Excess • Description • Excess hospital pricing • Territory: Southern Illinois (not St Clair/East St Louis) • Coverage • Limits: $5M/$5M umbrella. ALE is pro rata in addition • Retention: $1M/$3M primary through their captive • Claims handling: TPA • Exposures • Assumptions • Per actuarial study, small annual growth except 2003 with +26% jump in exposures

14. Case Study ExcessLoss History Evaluated at 6/30/2008

15. Case Study ExcessObservations & Pricing • Both Number of Claims and Incurred Dollars More Than Twice Expected • Frequency Did Not Follow Exposure Growth, so Assumed No Growth • Made No Adjustment For Loss Improvement Over Last Couple of Years • Development Assumption: Full Development Within 36 Months • Included Risk Load for Excess Layer • Premium: $1,410,000

16. Q & A

17. Many Thanks to • Jeffrey P. Klenk • William A. Dougherty, CIC, RPLU • Kenneth J. Hoppe, MBA, FCAS • Stephen Meyer, FCAS, MAAA • Dale Vincent Jr., FCAS, MAAA