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INTRODUCTION TO REINSURANCE EXPERIENCE & EXPOSURE RATING

INTRODUCTION TO REINSURANCE EXPERIENCE & EXPOSURE RATING. UNDERWRITING INFORMATION MICHAEL E. ANGELINA - TOWERS PERRIN ROBIN MURRAY – TOWERS PERRIN CAS RATEMAKING SEMINAR MARCH 11, 2004 PHILADELPHIA, PA. AGENDA. Introduction Description of Sessions Background Information Exposure Rating

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INTRODUCTION TO REINSURANCE EXPERIENCE & EXPOSURE RATING

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  1. INTRODUCTION TO REINSURANCE EXPERIENCE & EXPOSURE RATING UNDERWRITING INFORMATION MICHAEL E. ANGELINA - TOWERS PERRIN ROBIN MURRAY – TOWERS PERRIN CAS RATEMAKING SEMINAR MARCH 11, 2004 PHILADELPHIA, PA

  2. AGENDA • Introduction • Description of Sessions • Background Information • Exposure Rating • Direct vs Ceded Loss Ratio • Treatment of ALAE • Experience Rating • Burning Cost • Frequency / Severity • Recap • Audience Underwriting • Reconciliation of Estimates • Concluding Remarks

  3. BACKGROUND INFORMATION • Placement Terms for Subject Business • Layer: 100K xs 100K • Loss Occurring Policy;Effective 1-1-04 • Subject Premium $40 million • was $10 million - 6 years ago • Other Information - Quantitative • Historical on-level earned premium for company • Limits distribution/line of business profile • Classes of risk (mostly Table 2 Prem/Ops) • Schedule P - loss ratios, direct, ceded, net • Listing of large losses (40 > $30,000) • Histories included with large claims • Historical loss development of ground-up losses

  4. BACKGROUND INFORMATION

  5. Estimation PitfallsEffect of Policy Limit Drift on Prior Experience

  6. BACKGROUND INFORMATION

  7. BACKGROUND INFORMATION * Ultimate Loss & ALAE as reported in Schedule P

  8. BACKGROUND INFORMATIONObservations on Data • Significant growth over experience period • controlled growth or take-all-comers • expansion of current relationships with known agents • introduced new producers • Appearance of underlying policy limit drift • less than 50% of business had policy limits 500k and above • 2003 percentage is 64% • anticipated 2002 to 2003 saw more migration to higher limits • Strong u/w results for other liability lines of business • 35% to 40% on direct business • 38% to 43% on net business • Signs of development at later maturities • age-to-age factor of 2.78 for 33-45 month

  9. BACKGROUND INFORMATION • Other Information - Qualitative • Underwriting audits • Excess and surplus company • large writer of retail supermarkets in Northeast • Underwriting philosophy generally strong • Surcharge tougher risks • Generally knowledgeable about territories • Loss ratios have been stable by accident year • Claims audit • Reserving philosophy - development on large claims across all maturities • Settlement philosophy • Higher-than-average expenses

  10. Introduction toExposure Rating • Why Exposure Rate? • determines benchmark • incorporates changes in underlying risks • reflects distribution of policy limits • distinguishes risk profiles/classes • provides estimate where losses are sparse • eliminates issue of free cover • reflects underlying loss experience • somewhat; may not reflect excess experience • illustrates frequency and severity components • exposure curves produce average severity • implies certain frequency

  11. Exposure RatingMethodology • Distribute total premium to corresponding policy limits and lines of business • provided with premium distribution • allocation of premium to future year is critical assumption • Calculate amount of premium exposed to reinsurance layer • excess loss factor / increased limits factor • reflects line of business and underlying policy limit • Convert “exposed premium” to “exposed losses” • by line of business • Consider other factors • ALAE; Risk Loads; ECO/XPL

  12. Distribution of Premium to Layer • Premium Distribution by Policy Limit: LimitPremiumRetention100 Xs100Xs 200 100/100 7,000 7,000 0 0 300/300 8,520 6,842 1,066 612 500/500 10,000 7,379 1,150 1,471 1000/1000 14,480 9,641 1,502 3,336 40,000 30,862 3,717 5,420 • NOTE: All values in thousands

  13. Distribution of Premium and Expected Loss to Layer: Policy Limit $500/$500 Premium Loss Layer Distribution Distribution 0-100 73.8% 67.8% 100-200 11.5% 14.7% Above 200 14.7% 17.5%

  14. Allocation of Premium & Loss to Layer Limit Retention 100 Xs100 Xs200 Total 100/100 Premium 7,000 0 0 7,000 Loss 2,800 0 0 2,800 300/300 Premium 6,842 1,065 612 8,520 Loss 2,551 552 304 3,408 500/500 Premium 7,379 1,150 1,472 10,000 Loss 2,714 588 698 4,000 1000/1000 Premium 9,641 1,502 3,336 14,480 Loss 3,537 766 1,485 5,792 Total Premium 30,862 3,717 5,421 40,000 Loss 11,602 1,907 2,490 16,000

  15. ALAE by Layer Retention 100 Xs100 Xs200 Total Premium 30,862 3,717 5,421 40,000 Exp Loss 11,603 1,907 2,490 16,000 ALAE% 42.9% 20.9% 18.6% 36.6% ALAE 4,988 398 465 5,851 Loss&ALAE 16,591 2,304 2,956 21,851 L&LAE Ratio 53.8% 62.0% 54.5% 54.6%

  16. ALAE Load Can Vary • By layer • Model with two way variability • Load % decreases by limit • ALAE is then allocated to layers • One allocation formula for Pro Rata • A more complicated one for Added To

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