1 / 13

Loss Rating Models: Value Proposition?

This article explores the state of the industry in large account pricing, with a focus on the use of loss rating models. It defines loss rating, discusses its weaknesses, and examines the appeal of loss rating in both quantitative and qualitative terms. The article concludes with strategies for optimizing the value of loss rating.

jsheryl
Download Presentation

Loss Rating Models: Value Proposition?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Loss Rating Models: Value Proposition? Brian Ingle, FCAS, MAAA WC-4 Perspectives on Pricing Large Accounts 2006 CAS Ratemaking Seminar Salt Lake City, Utah

  2. Large Account Pricing: State of the Industry • Loss Rating Continues to Play Dominant Role in Pricing Large Accounts • Some Carriers Only Use Loss Rating Models

  3. Loss Rating Defined • A pricing approach that allows you to spend a lot of quality time with your favorite underwriter…

  4. Loss Rating Defined

  5. Loss Rating Defined • Pricing model that gives full credibility for account experience within often subjective “primary” occurrence layer • Expected excess losses often extended from “primary” via industry ELFs • Seldom incorporates manual loss costs • Loss Cost per Unit of Exposure Selected

  6. Loss Rating Doesn’t Come Cheap • Significant Resource Investment • Programming/Testing of Model • Maintenance/Updating of Factors • Data Verification, Input and Calculation • Education and Control

  7. Loss Rating Weaknesses • Credibility • Which Insureds Qualify? • Selecting Primary i.e. 100% Credibility Loss Limit

  8. Loss Rating Weaknesses

  9. Loss Rating Weaknesses • Prone to Subjectivity • Selecting “Primary” Loss Limit • Weighting Loss Rates • Difficult to Preserve Value as Benchmark • Price Monitors/Management Reports

  10. Loss Rating Weaknesses Subjectivity Weighting Loss Rates

  11. Appeal of Loss Rating – Quantitative • Can use client’s own development experience. • Can sometimes capture impact of risk changes obscured by experience rating. • More years involved in calculation than 3 used by experience rating. Although parameter shift diminishes value of older years. • Greater insight into insured operations can emerge. Really this should be captured through underwriting process.

  12. Appeal of Loss Rating – Qualitative • Marketing: Insureds want to see credit for their own experience…except for that one bad year. • Actuaries: Opportunity for greater transactional involvement

  13. Optimizing Loss Rating Value • Define Minimum Size Client Based on Industry Standard - E.g. minimum 50% credibility under NCCI X-Mod Rating • Incorporate Industry Loss Cost Estimate Into Model – Since NCCI X-Mod Credibility Always < 1 • Cap Loss Limitation at 10% State Reference Point • Use NCCI X-Mod Credibility to Weight Industry and Client Specific Loss Cost • Use Loss Rating Only When Credible Client Specific Development Triangles Available • Capture Average Loss Indication as Well as Selected for Management Reports

More Related