Claims-Made Ratemaking

1. Claims-Made Ratemaking Casualty Actuarial Society - Seminar on Ratemaking INT-6: Basic Techniques for Other Commercial Lines James D. Hurley

2. Advantages of Claims-Made Relative to Occurrence • Insured • Price is less if underlying trend is positive • Ability to keep policy limits current • Availability greater • Insurer • No IBNR - reserving and pricing easier, more accurate • With an unexpected change in trend, claims-made more correct • Shorter time horizon on future forecasts • Willing to offer claims-made where occurrence not viewed as option

3. Disadvantages of Claims-Made Relative to Occurrence • Insured • Understanding of coverage is not as great • Report date may be manipulated • Tail coverage - cost and understanding • Large price increases going from first year to mature • Insurer • Less investment income • Unfavorable Federal income tax treatment with use of industry payment pattern • Change in limits or specialty difficult to rate correctly • Historical data may be inappropriate when switching from occurrence to claims-made

4. Claims-made maturity has no occurrence counterpart • Different dimension of loss development • Claims-made has no “true” IBNR • Development by lag (RY - AY) • Exposures have 1-D in occurrence and 2-D for claims-made • Tail coverage links claims-made and occurrence Rate making Differences - Claims-made vs. Occurrence

5. Retro Date & Claims-Made Coverage MD who has coverage in 1988, began 1st year claims-made in 1985 Retroactive Date: 1/1/85 Definition: Occurrences on or after the retro date are covered by the claims-made policy.

6. Retro Date & Claims-Made Coverage MD who has coverage in 1988, began mature claims-made in 1985 Retroactive Date: Prior to 1983

7. Tail Coverage MD who began 1st year C-M in 1985, left at end of 1988 without tail

8. Tail Coverage MD who began 1st year C-M in 1985, purchased tail at end of 1988

9. Data & Lags

10. Data & Lags Note: Lag = Report Year - Accident Year

11. Data & Lags

12. Ratemaking Data Sum of Latest Diagonal = 655

13. Ratemaking Data Sum of Latest Diagonal = 655

14. Ratemaking Data

15. Ratemaking Data • Exposure based approach necessary • Why? • Handle various maturities/classes • Identify difference between development/emergence • L/R methods distorted by changes in reporting patterns • Require 2-D grid • No occurrence equivalent • Handle C-M entry (1st, 2nd, etc.) • Handle exit (tail vs. no tail) • Handle change in classes Exposures -

16. Ratemaking Data Exposure

17. Ratemaking Data Exposure - Class 1 Basis

18. Ratemaking Data • Require AY by RY • Why? • Loss corollary to 2-D exposure • Support development/emergence pattern distinction • AY only; lose RY consideration • RY only; lose exposure distinction and development can vary by lag • Procedure • A data triangle represents current evaluation • Calculate LDF’s by lag and age since report • Apply by cell to derive ultimate Losses

19. Data & Method - The 3rd Dimension Valued at 12/31/88

20. Method - Simplified Development by Lag

21. Method - Development by Lag * Assumed same as Lag 2.

22. Method - Developed Reported Developed to Ultimate

23. Calculate pure premium (or frequency/severity) in AY RY detail • Analysis of trends; reporting patterns • Expenses - consider flat loading • Recognize ILF differences Method Next Steps -