New Products – The Intersection of Pricing, Reserving, Planning

1. New Products – The Intersection of Pricing, Reserving, Planning Betsy DePaolo Vice President & Actuary, Personal Insurance Travelers Insurance Casualty Loss Reserve Seminar September 11, 2007

2. Pricing a New Product • Many different ways to price a new product • High Level Overview: • New Variables • Determine factors (multivariate analysis) • Determine base rates • Consideration of competition, disruption in marketplace, regulatory • New Underwriting Guidelines • Determine impacts of changes in mix • Will product be New Business Only or Conversion? • Conversion – determine disruption on current book • Calculate / Approximate the adequacy of filed rates • Compare to current book of business • Determine Expected Loss Ratio as starting point

3. New Product Rolls Out – Now What? • Business team needs metrics to determine how product is doing • Adequacy of pricing • Reserving ultimates for financial reporting • Planning / Forecasting • Expected experience in future years

4. New Product Rolls Out – Now What? • Use Expected Loss Ratio from pricing analysis as initial “best guess” • As losses begin to be reported, watch out for: • Distortions in Loss Development • Average Accident Date is not at midpoint of time period • Distorts in times of extreme growth or decline • “Large” Losses • Seasonality • Comparisons to current book of business • Changes in Mix • State distribution • Type of insured

5. Loss Development Distortions • Shift in Average Accident Date as product rolls out

6. Loss Development Distortions

7. Loss Development Distortions

8. “Large” Losses • How do you provide suitable results to business team without threat of overreaction? • Impact of Large Losses • Large is typically considered $100K or even more • Normally don’t expect large losses to impact short tailed lines (Comprehensive, Collision, Property Damage) • Early in rollout, calculate the Loss Ratio impact of $25,000 loss (average cost of totaled car) • Provide to business team to give sense of materiality

9. Seasonality • Significant impact on loss ratio experience • Weather • Travel • Geographical differences abound • Impact of catastrophes on comprehensive coverage • First year and beyond – uneven weight of premium by state can cause distortions in the loss ratios • When comparing Actual Loss Ratios to Expected Loss ratios • Adjust ELR’s for seasonality • Normalize actual loss ratios

10. Seasonality

11. Seasonality

12. Seasonality

13. Seasonality Rolled out in Jan 2006 Rolled out in 2005 Rolled out in Apr 2006

14. Seasonality

15. Comparison to Existing Products • Comparison to existing ultimate loss ratios and ELR’s • Adjusted for seasonality • Adjusted for New Product distribution by month • Adjustment for “environmental” conditions

16. Other Analytical Tools • Triangles Files • Drill down to monthly activity • Trend or Blip? • Analyze how quickly loss ratios settle down • Analyze differences in development between New Product / Existing Product • Frequency, Severity and Pure Premium Analysis • Triangles of Reported and Ultimate Data • Comparisons to Existing Product • Book of Business • Analyze impacts as book of business ages

17. Triangle Files – New Product Please note: All numbers are fabricated but illustrate the types of results that can be seen

18. Triangle Files – Existing Product Poor experience similar to new product Better experience than new product Please note: All numbers are fabricated but illustrate the types of results that can be seen

19. Book of Business • Additional analysis on where loss ratio is expected to go in future years • As book of business ages, we expect loss ratios to improve • Assumptions: • New Business Penalty / Renewal impacts on Loss Ratio • Growth in New Business • Retention • Filed Rate Changes

20. Other Considerations • Separately analyze • Catastrophe claims • Excess / Large Losses • Analysis completed both with LDF method and Bornhuetter-Ferguson method to reduce volatility

21. Incorporation into Planning • Projections of future new business growth • Projections of future retention / renewal • Incorporate into loss ratios, making additional adjustments for • Seasonality • Expected Excess Losses • Expected Catastrophe Losses • Additional mix shifts • Anticipated rate / factor adjustments

22. Advantages of Monthly Methodology • Responsive – allows business team to analyze data and make decisions quickly • Monthly loss development limits distortion due to growth • Monthly loss development allows drill down • Comparison to existing products allows recognition of environmental factors

23. Disadvantages of Monthly Methodology • Responsive – loss ratios can bounce around from month to month • Responsive – susceptible to distortion by large losses • Credibility – takes several months to have enough data to analyze • Monthly loss development still may have some distortion due to growth • Potential differences in loss development between products • Potential impact of mix changes in book of business

24. Other Applications • Applies to more than just New Product rollout • New Distribution Channel • New States • Accelerated Growth

25. Questions????