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2005 CAS Ratemaking Seminar Pricing and Market Conditions: Financial Lines

2005 CAS Ratemaking Seminar Pricing and Market Conditions: Financial Lines. Measuring Risk for D&O Liability Ben Fidlow, FCAS, MAAA. Executive Protection (D&O) Risks. Securities Class Action Lawsuits Brought by shareholders themselves

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2005 CAS Ratemaking Seminar Pricing and Market Conditions: Financial Lines

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  1. 2005 CAS Ratemaking SeminarPricing and Market Conditions:Financial Lines Measuring Risk for D&O Liability Ben Fidlow, FCAS, MAAA

  2. Executive Protection (D&O) Risks • Securities Class Action Lawsuits • Brought by shareholders themselves • Derivative Actions – Brought by shareholders on behalf of the company itself • Individual Shareholder Lawsuits • Employment Practices Litigation • Other Third-Party Lawsuits (government/regulators, competitors, clients/customers)

  3. Biggest Risk = Securities Class Actions • Exposure Base – Total Assets, Revenue, Market Capitalization • Pricing – Current market cap, 52-week high MC, moving averages, historical price dips • Reserving – Class period MC loss, event MC loss, maximum dollar loss, bounce-back effect, loss relative to the market as a whole • Expectation is the Key • How to measure it? • When is it misplaced?

  4. Securities Class Action - Data Issues • Lack of Loss and Exposure Data • Anomalies • IPO Laddering • Analysts • Mutual Fund Scandal • Insurance Bid-Rigging • Median vs. Mean • Market Cap Loss • Settlements • Historical Financial Data • Mergers • Bankruptcies • Settlement Amounts vs. Actual Insurer Losses

  5. Actuarial Science – Where Do We Fit In? • Not Easy – Why? Parameter Risk • Price Monitoring • Renewal Analysis • Premium per million of limit (Rate Per Million) • Adjust for attachment, change in market cap, coverage terms • Changes in perceived risk levels • Exclude certain accounts • Non-renewals • Overall portfolio • Monitor specific pricing statistics • Assist Underwriting • Set benchmarks, minimums • Actuarial input into rating plans • Black Box • Explicitly recognize and define risk characteristics

  6. D&O Actuarial Science – Specifics • Trend • Frequency – Look at number of filings, what is the universe of publicly traded companies? • Severity • Consultants and other agencies track settlements by Settlement Year • Analysis should be done by Filed Year • Equity run-up of the late ‘90s and subsequent bubble burst • Downward bias (bigger claims take longer to settle) • Annualized Factor • Risk Segmentation • Limits Usage • Need to reflect current economic environment

  7. Correlation to Market Cap Loss

  8. Settlements - Filed Year vs. Settlement Year Data as of 6/01/04

  9. D&O Actuarial Science – Specifics • Severity Distributions • Rate on Line – Excess pricing should be mathematically, not competitively driven • Segmentation into Homogeneous Groups • Market Cap Size • Industry • Companion Suits (Institutional Investor) • Other D&O Claim Types

  10. Segmentation – Average Settlements by Filed Year * Data as of 6/01/04 * 1998 Mega Cap amount limits Cendant to $500M

  11. Segmentation – Average and Median Settlements by Filed Year * Data as of 6/01/04 * 1998 Mega Cap Average amount limits Cendant to $500M

  12. Questions?

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