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The Contest – Part I

The Contest – Part I. CAS Seminar on Ratemaking March 9-10, 2000 Session SPE-47 MIGHTY DUCK ACTUARIAL CONSULTANTS: Jerome E. Tuttle, FCAS St. Paul Re Stephen J. Talley, ACAS St. Paul Re. The Contest. We decided to: Concentrate on Standards Borrow from Loss Reserves, especially

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The Contest – Part I

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  1. The Contest – Part I CAS Seminar on Ratemaking March 9-10, 2000 Session SPE-47 MIGHTY DUCK ACTUARIAL CONSULTANTS: Jerome E. Tuttle, FCAS St. Paul Re Stephen J. Talley, ACAS St. Paul Re

  2. The Contest • We decided to: • Concentrate on Standards • Borrow from Loss Reserves, especially • AAA Note on Reserve Opinions • Berquist & Sherman, PCAS 1977 • Be innovative, especially in cover letter and narrative • Have fun!

  3. Cover Letter • Qualifications of rate filer • “In my opinion these rates: • Meet requirements of Ins. Laws of Texas, incl. articles 5.01,...,21.81 • Are adequate, not excessive, not unfairly discriminatory • Are calculated based on accepted ratemaking standards & principles, including CAS Statement of Ratemaking Principles; ASB Standards 9, 12, 13, 23, 29, 30; textbooks & published papers” • Peer review of rate filing • Disk with all exhibits as spreadsheets • Picture of duck as letterhead

  4. Background Research • We read CAS principles, relevant ASB Standards • We read relevant insurance laws of Texas • We browsed 20 years of CAS papers for potentially useful ones, and we referred to them • We talked to actuaries, agents, claims folks, marketing folks, & underwriters, as a reasonability check on our assumptions • We questioned the accuracy of the data, and did not use data we were unsure of

  5. Unusual Things We Did • Triangulated CY Earned Premium • Calc’d Inc’d Indication & Paid Indication • Tempered a trend factor, justified in part from: • People we spoke with • Published paper in another line • Decided certain expenses should not be passed on to insureds • Allocated expenses between fixed & variable, & between salary-based & non salary-based

  6. Effect of 9/95 Tort Reform • We interpret Texas Code Article 5.14 as follows: • “A single loss reduction percentage” of 11.4%, regardless of specific years in the ratemaking database. • We spoke with people who feel the 11.4% is OK • But this single percentage implies A/Y 96 losses should be reduced by 11.4%, even though it already reflects tort reform savings • We complied with law, feel it conflicts with sound practice & disclosed our objection

  7. Actuarial Adjustments

  8. Actuarial Adjustments • Premium On-Leveling • Traditional parallelogram method impacted by changing level of exposures. • Use the discrete approximation offered by Frank Karlinski in his discussion of Miller and Davis paper, “A Refined Model for Premium Adjustment.” • Given Written Premiums by Calendar Quarter, calculate Earned Premiums by Calendar Year. • Given Rate Level by Calendar Quarter, calculate weighted average Rate Level by Calendar Year using Earned Premium as weights.

  9. Actuarial Adjustments

  10. Actuarial Adjustments • Frequency Trend • Frequency = Paid Counts / Earned Exposures. • Distorted when level of exposures is changing. • Compare Assigned Risk Frequency Trend with Voluntary Market Frequency Trend. • Adjust Assigned Risk Data to account for changing level of exposures.

  11. Assigned Risk Data

  12. Voluntary Market Data

  13. Actuarial Adjustments • Frequency Trend (BI) • Lag exposures using paid loss pattern. Try to match paid counts with the exposures that generated counts. • 158,839 exposures written in 1st quarter of 1993. • 40% “earned” between 1st quarter ‘93 and 1st quarter ‘94. • 45% “earned” between 1st quarter ‘94 and 1st quarter ‘95. • 15% “earned” between 1st quarter ‘95 and 1st quarter ‘96. • 7,942 exposures “earned” in 1st quarter of ‘93 from exposures written in 1st quarter of ‘93. (158,839 x 0.125 x 0.4) • For each calendar quarter, sum “earned” exposures from all exposure-writing quarters.

  14. Adjusted Assigned Risk Data

  15. Actuarial Adjustments • Frequency Trend • Unadjusted Assigned Risk Data indication [18.5% , 22.8%] • Voluntary Market Data indication [0.1% , -3.7%] • Adjusted Assigned Risk Data indication [-5.6% , -24.0%] • Select -6.5% through 12/31/97.

  16. Actuarial Adjustments • Frequency Trend • Considerations: • Using Paid Loss development pattern to estimate Paid Count development pattern. • Effect of Tort Reform in later data points. • “Quality” of Assigned Risk insureds worsening over time.

  17. Actuarial Adjustments • Frequency Trend • PD not as distorted by changing exposure level. • PIP and UM Assigned Risk Data indications not credible. • Used voluntary Market Data indications for PIP and UM.

  18. Actuarial Adjustments • Severity Trend • Distortion of changing exposure levels not as severe as for frequency. • For BI & PD, indications from voluntary and assigned risk data are similar. • PIP & UM not credible - used voluntary indication.

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