CAS Casualty Loss Reserve Seminar September 18 - 19, 2000

1. CAS Casualty Loss Reserve SeminarSeptember 18 - 19, 2000 Reserving for Asbestos Pure IBNR Kevin M Madigan RiverStone Resources

2. Reserving for Asbestos Pure IBNR High Excess (Re)Insurers: • Have significant pure IBNR exposure • Have significant policy data issues • e.g. old policies/slips not in systems • Lack valuable qualitative information

3. Reserving for Asbestos Pure IBNR How to Deal With These Issues? • Research known asbestos defendants • Match against policy database • May take significant effort to build DB • Use historical experience to project IBNR

4. Reserving for Asbestos Pure IBNR Using Experience to Project Pure IBNR • We have developed 2 report year methods inspired by: • [1] Cross, Susan L. and Doucette, John P., “Measurement of Asbestos Bodily Injury Liabilities”, PCAS, Vol LXXXIV, Nos. 160 and 161, pgs 187 -300 • [2] Haidu, Jim, “Estimating a Reinsurer’s Liabilities for Asbestos and Environmental Losses”, 1996 CAS CLRS

5. Reserving for Asbestos Pure IBNR Using Experience to Project Pure IBNR • Both methods use (report year) actual or modeled losses to arrive at a factor that is applied to exposed policy limits

6. Reserving for Asbestos Pure IBNR Using Experience to Project Pure IBNR • Method 1 uses account experience • Method 2 uses policy experience • Should any of the historical experience be excluded?

7. Reserving for Asbestos Pure IBNR Method I “Pricing” Approach • Allocate experience to layers • Calculate burn rates • Apply to potential IBNR policies

8. Reserving for Asbestos Pure IBNR Method I Allocate experience to layers • Each account has an actual (closed accounts) or modeled (open accounts) annual loss distribution

9. Reserving for Asbestos Pure IBNR Method I Calculation of Burn Rates

10. Reserving for Asbestos Pure IBNR Method I • Ideally want burn rate confidence intervals, from which baseline confidence intervals can be selected for each layer

11. Reserving for Asbestos Pure IBNR Method I • Apply Burn Rates to potential IBNR policies • Reporting Pattern(s)

12. Reserving for Asbestos Pure IBNR Method I • Apply Burn Rates to potential IBNR policies • Reporting Pattern(s) • Trend Assumptions e.g. 2% annual decay in burn rate

13. Reserving for Asbestos Pure IBNR Method I • Apply Burn Rates to potential IBNR policies • Reporting Pattern(s) • Trend Assumptions e.g. 2% annual decay in burn rate • Exposed Policy Limits

14. Reserving for Asbestos Pure IBNR Method I

15. Reserving for Asbestos Pure IBNR • Method I computes an annual ‘rate’ for each layer, and ‘charges’ the exposed policies the corresponding ‘price’. • Method II computes one factor to be applied to the limits of each policy

16. Reserving for Asbestos Pure IBNR • But wait! We have a wide assortment of attachment points and policy limits, so it hardly seems right to apply the same factor to each policy. Does a $25M x $200M policy have the same exposure to loss as a $4M x $1M policy? Of course not!

17. Reserving for Asbestos Pure IBNR Method II • Exposed policy limits are ‘adjusted’ as follows: • Adjusted exposure = TPE * Pr( GUL > AP) • where TPE = Total Policy Exposure • GUL = Ground-Up Loss • AP = policy Attachment Point

18. Reserving for Asbestos Pure IBNR Method II • Calculate historical ratios of loss to adjusted exposure for each report year (let’s call them loss cost factors)

19. Reserving for Asbestos Pure IBNR Method II • Calculate historical ratios of loss to adjusted exposure for each report year (let’s call them loss cost factors) • Select a base line confidence interval for the loss cost factors

20. Reserving for Asbestos Pure IBNR Method II • Calculate historical ratios of loss to adjusted exposure for each report year (let’s call them loss cost factors) • Select a base line confidence interval for the loss cost factors • Make assumptions regarding reporting pattern(s) and cost trend(s)

21. Reserving for Asbestos Pure IBNR Method II

22. Reserving for Asbestos Pure IBNR Method II

23. Reserving for Asbestos Pure IBNR Method II

24. Reserving for Asbestos Pure IBNR Other Issues • Loss trend may be positive, or trend rate may not be constant • Distinguish products liability from other liability • Not only source of “pure” IBNR • Commutation strategy