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Pricing Excess and Surplus Lines (COM-4)

Pricing Excess and Surplus Lines (COM-4). Ronald J. Herrig, FCAS Markel Corporation Deerfield, Illinois. What Is the Surplus Lines Industry?. The Surplus Lines industry provides a market for hard-to-place risks; risks the standard market chooses not to write.

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Pricing Excess and Surplus Lines (COM-4)

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  1. Pricing Excess and Surplus Lines(COM-4) Ronald J. Herrig, FCAS Markel Corporation Deerfield, Illinois

  2. What Is the Surplus Lines Industry?

  3. The Surplus Lines industry provides a market for hard-to-place risks; risks the standard market chooses not to write.

  4. Why are these risks not written by the standard market? • Distressed Risks/Markets • Unique Risks • High-Capacity Risks

  5. Distressed Risks – Something about the risk itself that makes it undesirable to the standard market. • Start-Up Manufacturer – No track record • New Physician • Physician with a History of Drug-Abuse

  6. Distressed Markets – Something about the entire category of risks that makes it undesirable to the standard market. • OB/GYNs - SOL • Junk Yards • Nutritional Supplements – What’s the new Ephedra?

  7. Unique Risks – Characteristics of the risk make it too unusual to fall within standard U/W classes. • Fireworks Accounts • Shamu Transportation • Architectural Projects

  8. High-Capacity Risks – Risks needing high limits of protection and in-depth underwriting • High Rise Buildings • Directors & Officers • Aviation Property/Liability

  9. How Can Surplus Lines Companies write this Junk (Profitably)?

  10. By being Fast, Fluid and Flexible!

  11. Regulation • No need to file rates/forms • Licensing required only in state of domicile • Not an unregulated industry, though

  12. Regulations That Do Apply • Annual Statements • Triennial Reviews • Market Conduct Exams • Risk-Based Capital Requirements • SEC Requirements

  13. Adaptable Policies • Claims-Made Coverage • ALAE included within Limits • Sublimits • Customized Endorsements

  14. And most importantly…

  15. Expert Underwriting Underwriters need: • to understand their company’s appetite for risk – and abide by it • knowledge of book’s underlying statistics • to understand each insured and its associated risks

  16. Claims Handling • Knowledgeable Claim Handlers • Standardized Approach to Claims Reserving • Consistent Approach to Claims Reserving

  17. Effects of the Market Cycle

  18. Hard Market and E&S • Admitted Companies become more selective. • Surplus Lines applications increase dramatically. • Rates Firm, Coverages Contract. • Small Decrease in Admitted Market can increase Non-Admitted Market Substantially.

  19. Change in Applications(2000 Baseline = 100 units)

  20. Soft Market and E&S • Admitted Companies become less selective in their Underwriting. • Fewer Risks are Declined. • E&S companies develop new products to maintain volume.

  21. Examples of New Products • Employment Practices Liability • Tenant Discrimination • Environmental Impairment Liability

  22. EPLI(1994 Baseline = 100 units)

  23. New Product Development • Opportunity identification • Product design • Testing • Product introduction • Life-cycle management

  24. Opportunity Identification • Broker Recommendations • Marketing • New Product Teams • Media

  25. Product Design • Target Market • Coverages • Policy Wording • Rating

  26. Testing • Beta-Test on Select Market • Honest Feedback • Rate, rate, rate

  27. Ratemaking Methods

  28. Ratemaking Methods for New Products • Pure Premium Methods • Piggy-back Method • Festus Method

  29. Pure Premium Methods • Ultimate Losses / Ultimate Exposures • Frequency x Severity

  30. Pure Premium Methods • Trend individual ‘ground-up’ losses; remove base deductible • Develop losses; cap at basic limit • Aggregate all adjusted losses.

  31. Pure Premium MethodTreatment of Exposures • Multiply individual units of exposure by applicable relativity factors (state, class code, claims-made step-rate, etc.) • Aggregate all adjusted exposures

  32. Pure Premium MethodCalculation of Rate Pure Premium = Aggregate Adjusted Losses Aggregate Adjusted Exposures Base Rate = Pure Premium Permissible L/R

  33. Pure Premium Method • Works well for an existing product • Works best for a product with a well-defined exposure base (doctors, employees) • Requires detailed loss and exposure info (claim-by-claim, policy-by-policy) • Actuarially sound

  34. Piggy-back Method • Start with Comparable Product • Adjust Rates for Coverage differences • Adjust for Limits/Deductible differences • Adjust for Expense differences • Others?

  35. Piggy-back Method • Works well for Enhancement of Existing Product • Requires knowledge of Comparable Product • Judgmental • Danger of being too Conservative/Aggressive? • Difficult to Support to Others

  36. The Festus Method

  37. The Festus Method

  38. Ratemaking Tools • Imagination! • Innovation! • Intuition! • Internet!

  39. Useful Sites • www.google.com – Big Brother is Watching! • www.firstgov.gov - U.S. Government’s Official Web Portal • www.bls.gov - Bureau of Labor Statistics • www.federalreserve.gov - Interest Rates

  40. Other Useful Websites • www.cas.org • www.cnn.com • Where ever else the web may take you!

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