Maximizing Reinsurance Value: Strategies for Effective Price Monitoring and Loss Development Analysis

1. How To Get The Biggest Bang For Your Reinsurance $$ CAS Spring Meeting May 17, 2004 Moderator: Karen Pachyn, Sr. V.P., & Chief Actuary GE Reinsurance Corporation Panelists: Michele Bernal, Chief Actuary – Direct Treaty American Re-Insurance Company Daniel Carberry, V. P. Benfield, Inc.

2. How to Get the Biggest Bang for Your Reinsurance Buck • Make Sure Your Reinsurer Understands What’s Happening • With Your Business • Give Him/Her Data to Demonstrate It

3. Discussion Topics • General Issues Given Where We Are in the Market • Importance of Price Monitoring • Loss Development Issues • Line of Business Issues • Umbrella • Work Comp • Contractors/Construction Defect • Property • Special Issues Surrounding Cat and Terrorism Exposures

4. General Issues • Reinsurers Use Two Basic Pricing Approaches • Experience Rating • Exposure Rating • Also Want to Know Current/Projected Rates

5. General Issues • Reinsurers Rely Heavily on Historical Data • How Does This Compare to Your Going Forward Book • In Hard Market, Favorable Changes Made • May Not Be Evident in Standard Data Request • Help Reinsurer Understand These Changes • What Were They • How Will They Impact Your Loss Ratio • What Data Can You Provide to Support That

6. General Issues • Common Changes in Hard Market • We No Longer Write in State X • Provide Data by State • We Cancelled a Bunch of Agents • Provide Data for Those Agents Vs. Others • Explain Why Business Won’t Just Go to Agent Across the Street • We Got Out of Classes of Business • Provide Data With and Without Those Classes • Why Those Classes? • Prove It Wasn’t Just Bad Luck That Caused the Classes to Be Bad • We’ve Changed Our Underwriting Standards • What Changes Were Made • What Percent of the Business Do They Impact • Why and How Will That Improve the Loss Ratio

7. General Issues • How to Get the Reinsurer to REALLY Buy Into What You Are • Telling Them • Give Them a History of at Least 5 to 6 Years, Not Just Last Year • Vs. This Year • Provide Premium PLUS Loss Data • Have Direct Actuarial Discussions • Make Sure the Data Ties to Other Exhibits/Balances/Makes Sense

8. Importance of Price Monitoring

9. Importance of Price Monitoring • Cleanest Is Filed Manual Rates in One Company • Ideally Filed Rate Changes • Changes in Loss Costs, Loss Cost Multipliers • Deviations off Rates? • Inflation Sensitive Exposure Base? • Changes in TIV?

10. Importance of Price Monitoring • Complications • A-Rated Business • Non Admitted Carrier • Tiered Rate Levels – Multiple Companies

11. Importance of Price Monitoring • A Good Price Monitoring System: • Measures Premiums Charged Year Over Year • Adjusts for Changes in Number of Exposure Units • Adjusts for Changes in Limits, Deductibles, SIR’s, Etc. • Adjusts for Changes in Coverage • Captures a Significant Portion of Renewals • Measures New

12. Importance of Price Monitoring • Price Monitoring Example: • Renewing Prem. Expiring Prem.Price Change • All Policies $ 30,450,000 $ 24,975,000 22% • Policies w/ Eq. Terms 21,125,000 18,500,000 14% • Exposure Base 20,950,000 23,145,000 • Price Per Exposure 1.453 1.079 35%

13. Importance of Price Monitoring • Price Monitoring • Best Approach – Rerate This Year’s Policy at Last Year’s Rates • Captures Changes in Limits, Exposures, Etc. • Way to Measure New Business • Time Consuming – Automated • If Debits or Credits Judgmental, How Do You Accurately Capture That?

14. Loss Development Issues • Reserving Cycle • Nature of Large Losses

15. Loss Development Issues - Reserving Cycle • Increases in Incurred Loss Development • Big Question : What Will Development Be in the Future? • Three Possibilities: • Higher? – Maybe the Higher Development Is Due to Increased Inflation – Case Reserves Are Just Barely Keeping Up, and Incurreds Will Increase More in the Future • Lower? – Our Reserves Are Much Stronger Than They’ve Been in the Past, So Future Development Will Be Less • Somewhere in Between? – If So, Where?

16. Loss Development Issues - Reserving Cycle How Do You Know? What Can You Do? What Will Your Reinsurer Do??

17. Loss Development Issues – Reserving Cycle • How Strong Are the Reserves? • Provide Triangles of Paid/incurred Ratios • If Reserves Are Stronger Than Historical, Ldf’s Can Be Adjusted Downward • Are Losses Being Distorted by Timings of Claims Closings or an Increase in Settlements? • Provide Triangles of Closed Claims and Reported Claims to See % of Claims Remaining to Be Closed • If More Claims Closed Than Historical, Tail Can Be Reduced • Is It Inflation or Just Reserve Strengthening? • Provide Paid or Closed Losses/closed Claims

18. What About Large Claims?

19. Loss Development Issues – Large Claims • Important to Understand Differences Between How Small and Large Claims Are Reserved • Different Department? • Are Initiatives That Impact Aggregate Losses Impacting the Large Losses in the Same Manner?

20. Loss Development Issues – Large Claims • Leveraged Impact of Development on Excess Losses - WC

21. Loss Development – Large ClaimsVariations in Excess Development Work Comp – 500k X 500k

22. Loss Development Issues – Large Claims What Can I Do? • Important to Track Large Claim Data at Historical Valuations • E.G., Each Year-end Since Reported. • Reinsurer Can Build Loss Development Triangles for On-level Excess Losses

23. Line of Business Issues

24. Line of Business Issues - Excess and Umbrella • Historical Experience • Loss Listing • Umbrella Limits Associated With Loss • Underlying Limits • Line of Business • Underlying Carrier • Signal Reserves Vs. Other • Most Recent Evaluation As Well As Prior Evaluations

25. Line of Business Issues - Excess and Umbrella • Historical Experience • Premium Trends – Want to Get Full Credit for Big Increases! • From Price Monitoring • Support for Trends • Minimum Premiums – When and How Much • Auto Unit Rate Changes • Factors for First Million As % of U/L • Factors for Subsequent Millions • Credits or Debits Allowed • Handling of Underlying Rates • Trends in Underlying Rate Levels • Average Premiums Per Million Changes • Admitted Vs. Non Admitted • Current and Future Rate Levels & Strategies for Achieving

26. Line of Business Issues - Excess and Umbrella • Historical Experience • What Else Is Different Today Vs. Yesterday • Attachment and Limits Point Profiles – Current and Historical • Mix of Supported Vs. Unsupported • Type of Risks in Portfolio

27. Line of Business Issues - Excess and Umbrella • More on Limits Profiles • Matrix Format • Attachment Point 1000 2000 3000 4000 5000 10000 Total • 300 5% 5% • 500 8% 12% 20% • 1000 43% 15% 7% 5% 3% 2% 75% • Total 56% 27% 7% 5% 3% 2% 100%

28. Line of Business Issues - Excess and Umbrella • More on Limits Profiles • Individual Policy Listing • Insured U/L CarrierU/L LimitsX/S LimitsCC’s ShareLOB • Krispy CrunchiesFeelings Mut. 5000 25000 10% Auto • Colorado Dreams ABC Ins. Co. 1000/2000 5000 100% Prod. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

29. Line of Business Issues – Workers Comp • Are Claims “Discounted”? • They All Are • Medical Inflation Is Not Contemplated • Mortality Tables in Stat Plan Have State-specific Discount • Discount for Reduced Life Expectancy • Most Claims People Aren’t Aware of This “Discount” • The Difference in Reserve Levels Is the Degree of “Discount”.

30. Line of Business Issues – Workers Comp • Impact of Settlements • Some States More Accommodating • Some Companies More Aggressive • Paid Development Up • Incurred Development Down • Provide # of Settlements and Size by Year • Reinsurer Can Adjust Tail Downward

31. Line of Business Issues – Workers Comp • Benefit Changes Impact Different Claims Differently • California • AB749 – Significant Increases in Permanent Total Benefit Levels • SB899 – Significant Savings in Aggregate Losses and Average Medical Losses; Impact on Severe Claims Uncertain • Net Effect on XS Loss Rates? • Separation of Data Between Medical, Indemnity and ALAE Can Improve Accuracy of Projections on a 1st Dollar Basis.

32. Line of Business Issues – Workers Comp • Premium Issues • Treatment of Retro Premiums • Prior Year AP’s Usually Included in Current Year EP • Provide Estimate of Historical & Prospective Adjustments, or • Use Standard Premium As a Subject Base? • Make Sure Contract Wording Is Clear • Treatment of Audit Premiums • Treatment of Dividends

33. Line of Business Issues – Contractors • Important to Track Historical Timing of Changes in Forms • Helpful If Claims Not Covered Under New Forms Could Be Identified

34. Line of Business Issues - Property • Special Considerations for Excess Per Risk Covers • Exposure Rating • PSOLD Expects Limits to Be Building and Contents Only • Limits Should Be on a Per Location Basis • Excess??

35. Data And Property Catastrophe Reinsurance Pricing

36. Data And Reinsurance Pricing Agenda • Catastrophe Reinsurance Pricing Overview • Loss Variability • Terrorism Coverage Considerations • Conclusions

37. Catastrophe Reinsurance Pricing Overview

38. Catastrophe Reinsurance Pricing Basic Pricing • Premium = Modeled Pure Premium To Layer + Factor Of Standard Deviation • Capital Allocation, Return On Equity At PML Level • Dependent On Modeling

39. Catastrophe Reinsurance Pricing Other Considerations • Existing Capacity By Region • Loss Experience • Lead Markets • Prevailing Rate On Line For Business Segment • Quality Of Data Available • Reinsurer Will Make Conservative Assumptions

40. Catastrophe Reinsurance Pricing Data Typically Provided To Reinsurers • Model Inputs And Outputs • UNICEDE Data • Modeling Summary • Explanation Of Changes From Previous Year • Narrative On Expected Changes Going Forward • Catastrophe Loss Experience

41. Loss Variability

42. Loss Variability Catastrophe Models • Three Widely Accepted Models Used In The • Insurance Industry • All Produce Different Results • Models Change • Reinsurers Are Using All Of Them • Catastrophe Models Are Not Good At Checking • Validity of Data

43. Loss Variability Data Quality • Aggregate Vs. Policy Level • Street Address Vs. Zip Code • Personal: 90%+ Street Address • Commercial: 50-75% Street Address • Automobile: Almost Always ZIP Code Aggregate • Use Of Unknowns • Construction, Occupancy, Year Built, Number Of Stories

44. Loss Variability Data Quality • Application Of Deductibles • Insurance To Value And Guaranteed Replacement Cost • Data As Of Date

45. Loss Variability Data Quality • All Data Captured? • Inclusion Of Facultative Or Surplus Share Data • Bulk Coding Of Commercial Locations • Number Of Buildings • Scheduled Property (Inland Marine)

46. Loss Variability Other Factors • Demand Surge • Storm Surge • Allocated Loss Adjustment Expenses • Law/Ordinance Coverage • Inuring Reinsurance

47. Terrorism Considerations

48. Terrorism Considerations Data Available • Property Data – Usually Available From Catastrophe • Modeling Exercise • Worker’s Compensation Data – Harder To Collect • At Useful Level Of Detail • Object Is To Evaluate Exposure To Clash Loss

49. Terrorism Considerations Tools Available • Accumulation/Concentration Analyses • Probabilistic Models • Deterministic Models

50. CONCLUSIONS