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Pricing Excess and Surplus Lines (COM-5)

Pricing Excess and Surplus Lines (COM-5). Ronald J. Herrig, FCAS Markel Corporation Deerfield, Illinois. What Is the Surplus Lines Market?. The role of the Surplus Lines industry is to provide a market for hard-to-place risks that are not written by the standard market.

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Pricing Excess and Surplus Lines (COM-5)

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  1. Pricing Excess and Surplus Lines(COM-5) Ronald J. Herrig, FCAS Markel Corporation Deerfield, Illinois

  2. What Is the Surplus Lines Market?

  3. The role of the Surplus Lines industry is to provide a market for hard-to-place risks that are not written by the standard market.

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

  5. Examples of Distressed Risks • Newly Incorporated Manufacturer • Newly Practicing Physician • Physician with a History of Drug-Use • Lawyer with Past Disciplinary Problems

  6. Examples of Distressed Markets • OB/GYNs • California Contractors • Nutritional Supplements

  7. Examples of Unique Risks • Architectural Project Policies • Fireworks Accounts • Shamu Transportation

  8. Examples of High-Capacity Risks • High Rise Buildings • Directors & Officers • Aviation Property/Liability

  9. How Can Surplus Lines Companies write this Junk?

  10. By being Fast, Fluid and Flexible!

  11. Regulation • Needn’t file rates/forms • Insurance company licensed in state of domicile only • Many Responsibilities passed to the Surplus Lines Broker

  12. Coverage Limitations • Claims-Made Coverage • ALAE included within Limits • Sublimits • Custom Endorsements/Exclusions

  13. Responsibilities Handled by Broker • Verify Diligent Search Completed • Maintain Policy Files for Audit • Collect and Remit Premium Tax

  14. And more importantly…

  15. Expert Underwriting U/Wers need: • to understand their company’s appetite for risk – and abide by it • knowledge of book’s underlying statistics • to understand each insured and it’s associated risks Art, science, experience

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

  17. Effects of the Market on E&S

  18. Hard Market and E&S • Admitted Companies non-renew any iffy risks. • Surplus Lines Apps increase dramatically. • S.L. Rates Firm, Coverages Contract. • Small Decrease in Admitted Market can increase Non-Admitted Market Substantially.

  19. Change in Applications(Products 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. Life Cycle of New Product • Coverage unavailable in Standard Market. • E&S develops coverage, forms, exclusions, rates. • Rates, Forms change quickly, as needed. • Rates, Forms Stabilize – Profit Grows • Standard Market offers broader product at lower rates.

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

  23. EPLI(1994 Baseline = 100 units)

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

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

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

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

  28. Ratemaking Methods

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

  30. 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

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

  32. 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

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

  34. 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

  35. The Festus Method

  36. The Festus Method

  37. Ratemaking Tools • Imagination! • Intuition! • Internet!

  38. Useful Sites • www.google.com • www.firstgov.gov - U.S. Government’s Official Web Portal • www.bls.gov - Bureau of Labor Statistics • www.federalreserve.gov - Interest Rates

  39. Other Useful Websites • www.cas.org • www.cnn.com • www.espn.com • www.imdb.com

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