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2006 Seminar on Reinsurance Parameter Risk – Where Does it Come From and Why

2006 Seminar on Reinsurance Parameter Risk – Where Does it Come From and Why. Rich Lino Consulting Actuary, Pinnacle Actuarial Resources. Sources of Parameter Risk. Catastrophe exposure Pricing Loss development Changes in business mix Other changes in parameter risk

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2006 Seminar on Reinsurance Parameter Risk – Where Does it Come From and Why

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  1. 2006 Seminar on ReinsuranceParameter Risk – Where Does it Come From and Why Rich Lino Consulting Actuary, Pinnacle Actuarial Resources

  2. Sources of Parameter Risk • Catastrophe exposure • Pricing • Loss development • Changes in business mix • Other changes in parameter risk • Actions to mitigate parameter risk

  3. Catastrophe Risk • Accuracy of exposure data • Weather cycles: 2006 predictions are for 150% to 200% of last century average (ISO-Dr. Gray) • Model revisions • Impact of growth in exposed areas • Earthquake below long-term average?

  4. Pricing • Average price level change • Impact of changes in terms/conditions/limits • Miscoding of class, tier, E&S Vs. Standard Lines • Price monitor for new business • Changes in mix of business • Winner’s Curse

  5. Loss Development • Cycle- Reserve weakening, payment slowdown will bias ultimates on the low side in soft markets and vice versa • Variations by Company – Base, Cycle • Variations by Layer • Changes in terms/conditions/limits can affect development

  6. Industry Aggregate-Med Mal Total

  7. Changes in Business Mix • Prices declining, more exposure per premium dollar • More adverse winner’s curse causes lower retention • Lower retention means more new business per premium dollar • Severe winner’s curse on new business • Failure to adjust creates parameter risk

  8. Drivers of Parameter Risk - WC

  9. Parameter Risk From Reinsurer’s Perspective

  10. Other Potential For Parameter Risk • Offering limits not previously available • Value of information not provided (cyclical) • Buy downs of limit – asymmetric information • Self-insurers moving in and out of the market • Impact of acquisitions on pricing assumptions • Cycle of ISO/NCCI pricing adequacy • MGA cycle • Optimism/pessimism cycle

  11. Other Potential For Parameter Risk, cont’d • Multi-year policies – direct and assumed • Loosening terms and conditions • Loosening underwriting standards • Adverse selection as top tier companies refine rating structures • Impact of changing mix of TPAs • Beware high growth and “fighting claims”

  12. Actions to mitigate parameter risk • Measure all aspects of price change • Monitor industry and client reserve adequacy • Monitor total change in industry price & L/R • Focus audits on new business • Model impact of winner’s curse in soft market • Pursue identification of turning points • Set data quality standards and keep them • Refine pricing by account

  13. Source: Pinnacle calculations from AM Best data base

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