2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

1. Canadian Institute of Actuaries L’Institutcanadien des actuaires 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

2. Property and Casualty Insurance Ratemaking Committee - update Blair Manktelow Shams Munir 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

3. Status Update Exposure draft is not yet approved by the ASB ASB meeting later this month to hopefully approve 60-day comment period once released Revisions will be incorporated Final version hopefully approved in 2010 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

4. Definitions (page 1 of 2) Credibility is a measure of the predictive value attached to an estimate based on a particular body of data Credibility procedure is the blending of information from the subject experience with information from one or more sets of related experience Indicated rate is the best estimate of the premium rate to be charged to the insured 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

5. Definitions (page 2 of 2) Related experience includes premiums, claims, expenses, and other relevant data for coverage analogous to the coverage under consideration other than the subject experience and may include established rate levels or differentials or external data Subject experience includes premiums, claims, exposures, expenses, and other data relevant to the coverage under consideration Trending is the process of evaluating how changes over time affect a variable, and adjusting projected estimates of that variable to levels that are anticipated for the forecast period 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

6. Scope (page 1 of 3) Apply to property and casualty insurance; that is, insurance to possessors of tangible or intangible property for costs arising from loss of or damage to such property (e.g. fire, fidelity, marine hull, warranty, and title insurance), and insurance to individual or other legal persons, for costs or damages to others arising from the actions of such persons (e.g. liability and mortgage loan insurance and surety bonds) and for costs arising from injury to such persons (e.g. automobile accident benefits insurance) 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

7. Scope (page 2 of 3) Standards do not apply to public personal injury compensation plans Apply to the derivation of indicated rates for P&C insurance. May also provide useful guidance for the derivation of indicated rates for enterprises that are not incorporated insurers Do not apply to the selection of rates 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

8. Scope (page 3 of 3) Ratemaking is generally prospective because the indicated rate is usually developed prior to the transfer of risk Indicated rate provides for all costs so that the insurance system is financially sound Equity across insureds is maintained by providing for the costs of an individual risk transfer. An indicated rate from aggregate experience of similar risks is an estimate of the cost of the risk transfer for each individual in the class 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

9. Methodology For an insurance coverage to be provided over a specified period of time, the actuary should derive an indicated rate such that the present value of the future cash flows relating to the expected revenue at the indicated rate equals the present value of the future cash flows relating to the corresponding expected claim costs, expense costs, and provision for profit. 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

10. Methodology – sub sections Data Changes in Risk Claim Development Trending Experience adjustments Credibility Expenses Provision for Profit 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

11. Data (Methodology) Identify the source & time period covered by the data Assess the relevance, appropriateness, and sufficiency of the data Assess the quality (accuracy, reliability) of the data Understand the general characteristics, format and content of the data Gain familiarity with the system & transactions that record the data Gain familiarity with the general contractual terms and benefits provided by the insurance coverage Check or reconcile the data for consistency 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

12. Changes in the Risk (Methodology) Reflect factors that were or are largely under the control of the insurer, such as underwriting standards or methods, case reserve setting standards and practices, claims management policies and practices, the mix or type of business written, reinsurance arrangements, and insurance product policy wordings, benefits or coverage 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

13. Changes in the Risk (Methodology) Reflect factors that are largely outside the control of the insurer, such as legislated coverages or benefits, the economy, the social environment, the political environment, and the legal environment 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

14. Claim Development (Methodology) The actuary: would subdivide the data in an appropriate fashion by length of time period (year, half year, or quarter year) AND time intervals grouping (e.g., by accident period, policy period, or calendar period), avoid groups whose data are too sparse for reasonable analysis AND would subdivide the data into reasonably homogeneous sub-groups of similar types of claims would select the experience period of the data to project ultimate claims with reasonable reliability, might include analysis of related experience might include appropriate adjustments to the data to restate them to remove the effect of intervening changes within the insurance environment would select appropriate methods to estimate the ultimate claim costs 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

15. Trending (Methodology) Applies to claims, premiums and exposure trending Considerations subdivided between considerations relating to selection, subdivision and analysis of data 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

16. Trending (Methodology) Selection of Data availability, degree of accuracy and homogeneity of the data, and relevance of the data (i.e., similarity to the jurisdiction, coverage and/or sub coverage, kind of loss, company, etc. for which the indicated rate is being derived) 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

17. Trending (Methodology) Subdivision of the Data categorizing the data into time intervals AND time intervals groupings, weighed against any resulting loss of data stability or responsiveness, categorizing the data into separate components weighed against any possible masking of underlying correlations 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

18. Trending (Methodology) Analysis of the Data changes in the underlying risk Credibility Seasonality Time interval length of the experience period length of the forecast period economic, social, demographic, or environmental influences trending procedures established by precedent or common usage or performed in previous analyses the use of mathematical models to identify and extrapolate trends; the success of the model in making prior projections, and the statistical goodness of fit of the model to the data 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

19. Trending (Methodology) Analysis of the Data (continued) fluctuation in the data points, the relative weights given to each data point and changes in historical patterns uncertainty surrounding the estimated ultimate values of the data the degree to which past trend patterns may or may not be reflective of future trend patterns reasonableness of the results produced by the analysis 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

20. Experience Adjustments (Methodology) To remove biases and distortions in the experience from Impact of large & catastrophic claims Regulatory or legislative changes Seasonality Reinsurance recoveries Changes in the mix of business Changes in underwriting rules Shifts in the distribution of rating variables Data errors Changes in rate level 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

21. Credibility (Methodology) Considerations: various actuarial methods for determining credibility generally accepted practices homogeneity of the subject experience and the related experience relevance of the related data independence of the subject experience and the related experience biases that may exist in the credibility method or related data used practicality of application availability of data predictive power of the estimation procedure reasonableness of results 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

22. Expenses (Methodology) May be specified Comprises all costs other than claim costs & profit, including Claim adjustment expenses Commissions & Other Acquisition Expenses General Administration Policyholder Dividends Reinsurance Costs Residual Market Expenses Statutory Assessments, Taxes, Licenses and fees 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

23. Expenses (Methodology) Considerations past expenses changes in conditions that may cause past expenses not to be reflective of future expenses changes that may have occurred in the way expenses are measured one-time expenses and whether or not such expenses would be amortized whether expenses that are not, by their nature, directly proportional to premium would be imputed on a per policy, per coverage, percentage of claim costs, or per unit of exposure basis whether expenses vary based on the distribution system whether expenses vary between new and renewal policies 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

24. Profit Provision (Methodology) Silent on considerations This profit provision is not the same as what is commonly referred to as underwriting profit 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

25. Reporting Currently no standard reporting language other than in certain automobile rate filings. If required these could be used. 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

26. Standard Reporting Language actuary responsible for all assumptions: I have prepared the indicated rate[s], or range of indicated rate[s], on behalf of [official name of “insurer”], for the following insurance coverage[s]: [name of coverage(s)]. I have derived the indicated rate[s], or range of indicated rate[s], to be effective [Month XX, 20XX] for new business and [Month XX, 20XX] for renewal business. In my opinion, the indicated rate[s], or range of indicated rate[s], has [have] been calculated in accordance with accepted actuarial practice in Canada. 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

27. Modified Reporting Language actuary does not take responsibility for all assumptions: I have prepared the indicated rate[s], or range of indicated rate[s], on behalf of [official name of “insurer”], for the following insurance coverage(s): [name of coverage(s)]. I have derived the indicated rate[s], or range of indicated rate[s], to be effective [Month XX, 20XX] for new business and [Month XX, 20XX] for renewal business. In my opinion, the indicated rate[s], or range of indicated rate[s], has [have] been calculated in accordance with accepted actuarial practice in Canada. However, I have not taken responsibility for the following assumptions as stipulated by the terms of the engagement: (A listing of assumptions for which the actuary does not take responsibility would follow.) 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

28. Property and Casualty Insurance Ratemaking Committee : Blair Manktelow Shams Munir Ron Miller Ted Zubulake Jean-Francois Larochelle Mylene Labelle Betty-Jo Walke 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009