1 / 19

Plastic Card Fraud Coverage and Its Actuarial Challenges: A Case Study

Plastic Card Fraud Coverage and Its Actuarial Challenges: A Case Study. Fall 2006 MWAF September 29, 2006. Case Study Format. This morning, we will…. Describe a coverage that CMG writes. Present two specific actuarial challenges.

perry-sloan
Download Presentation

Plastic Card Fraud Coverage and Its Actuarial Challenges: A Case Study

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. Plastic Card Fraud Coverage and Its Actuarial Challenges: A Case Study Fall 2006 MWAF September 29, 2006

  2. Case Study Format This morning, we will… • Describe a coverage that CMG writes. • Present two specific actuarial challenges. • Ask the audience to brain storm possible solutions or avenues of research for the two challenges.

  3. Remember… • When we “brain storm”, there are no bad or dumb ideas. • This session really depends on your participation. • We have 50 minutes.

  4. The Plastic Card Coverage • Reimburses the insured for losses resulting from an Unauthorized Transaction occurring in the insured’s Card Programs. • Unauthorized Transactions: stolen cards, counterfeited card, “card not present” internet purchases. • Card Programs: Credit, Debit and ATM.

  5. Structure of the Plastic Card Coverage • “Account Number” deductibles and limits (AKA “per card deductibles and limits”). Example: $100 deductible and a $15,000 limit • Annual aggregate deductibles and annual aggregate limits. Example: $25,000 AAD and a $1m AAL

  6. Example of Adjusting a Plastic Card Loss • $100 per card deductible and a $15,000 per card limit. • $25,000 AAD and a $1m AAL.

  7. Scale of CMG’s Plastic Card Program • CMG insures approximately 5,500 credit unions for Plastic Card. • Credit union card programs range from a few hundred to 700,000 cards. • ~1,000 credit unions exceed their AAD each year. • ~90,000 card accounts will sustain losses on policies written in 2006.

  8. The annual aggregate deductible • Frequency of Plastic Card losses We will see that the two actuarial challenges are related to…

  9. Looking for Analogies • Has anyone worked with a coverage that uses an annual aggregate deductible? • Possible analogies: • Excess Aggregate WC Policy • Excess Reinsurance with AAD • Medical Policies with Family AAD

  10. The Loss Reserving Challenge • How does the Reserving Actuary reserve for the Plastic Coverage, a high loss frequency coverage that uses an AAD ? The answer to this question probably depends on the answers to… • How does the Reserving Actuary count claims and assign loss dates?

  11. A Plastic Card Loss Scenario

  12. Loss Reserving Challenge: Approach #1 Suppose we use the convention that we will count and record claims at the policy level, that is, if the AAD is exceeded, we record a single claim. • What loss date do we use? • Do we change the loss date if a loss at the cardholder level changes? • Reserve using AY or PY histories? • Is there is an appropriate matching of revenues and losses?

  13. Loss Reserving Challenge: Approach #2 Suppose we use the convention that we will count and record claims at the cardholder level. • What loss date do we use? • What do we do with the AAD? Allocate a portion of it to each cardholder loss? Does the allocation change with additional cardholder losses? • Reserve using AY or PY histories? • Is there is an appropriate matching of revenues and losses?

  14. Pricing Challenges • For this complex coverage and rapidly changing loss environment • What exposure base should the Pricing Actuary use? • What combination of Pricing Plans (manual, experience and schedule rating) is best • Structuring manual rating for both - Per Event Limit and Deductibles, and- Aggregate Limit and Deductibles

  15. Pricing the Aggregate Deductible Is it sufficient to … • Design a table of Excess Loss Factorsby Deductible Amount? (Too much variation by size of account)

  16. Pricing the Aggregate Deductible Is it sufficient to … • Design a table of Excess Loss Factors by ratio to pure premium (“Entry Ratio”)? (Better, but still too much variationby size of account)

  17. Sidebar: Entry Ratio is not sufficient Are the following equivalent? • 1 policy of 10,000 cards at AAD = 1.0 * E(L) • 100 policies of 100 cards at AAD = 1.0 * E(L) No: Excess loss on 100 small policies will be much higher than on a single large policy

  18. Pricing the Aggregate Deductible Is it sufficient to … • Design a table of Excess Loss Factors by Entry Ratio and size grouping? ? • How many columns do we need? • Creates issues related to column “transitions” • Model interaction with Per Event limitations?

  19. Recent Plastic Card Experience • Beginning with the 4Q 2004, Plastic Card Losses Have Sky-Rocketed Because of.. • Increased Credit Card Counterfeiting Related to File Intrusion at Merchants. • Increased Debit/ATM Card Fraud Related to “Phishing”. • “Ground Up” Losses Have More Than Tripled.

More Related