PITFALLS IN REINSURANCE PRICING • • • • • • Trend, Development Beyond Policy Limits Trending vs Detrending Cessions-rated Treaties Bornhuetter-Ferguson Data Issues Using Simulation.
Download ReportTranscript PITFALLS IN REINSURANCE PRICING • • • • • • Trend, Development Beyond Policy Limits Trending vs Detrending Cessions-rated Treaties Bornhuetter-Ferguson Data Issues Using Simulation.
PITFALLS IN REINSURANCE PRICING • • • • • • Trend, Development Beyond Policy Limits Trending vs Detrending Cessions-rated Treaties Bornhuetter-Ferguson Data Issues Using Simulation • How do you know if there is a problem? – Experience rating >>Exposure rating – Large number of claims at round numbers coinciding with limits profile – Little exposure in covered layer based on limit profile Cont’d • What to do if you have a problem – Cap trended losses at the policy limit, except... • Are policy limits changing over time? – Adjustment necessary only if limits are not changing – Trending beyond limits assumes that policy limits are keeping pace with selected trend • What if losses already exceed policy limits? • Detrending the loss limits can be used in experience rating, instead of trending the loss forward. • What premium do you divide the detrended excess losses by to get the excess layer loss cost? – Actual premium, if rate changes =loss trend – “Detrended” premium, if the rate level is flat – what if the rate level has been decreasing? • Be sure to use consistent assumption for the gross expected loss ratio in exposure rating. • “Trust me”. No information provided on cessions factors or ILFs – Why? There are no ILFs. The company is using “market” rates. – Use agreed-on cessions factors. – Check out the underlying premium adequacy. Cont’d • Good News/Bad News – The “Good”: Base rates have been increased – The “Bad”: Total rates remained the same – The “Ugly”: Guess who gets the short end of the deal? The XOL reinsurer. – Why? ILFs must have decreased. Cont’d • Same cessions factors regardless of SIR – Solutions: • Factors varying by SIR (rare) • Factors applying to ground-up premium prior to SIR credit Cont’d • Example – Policy Limit = 5M, Layer =$4Mxs1M – ILFs are as follows: » » » » » Limit 1M 2M 5M 6M ILF 1.00 1.15 1.33 1.36 – Rate, no SIR = (1.33-1)/1.33 = 25% – Rate, $1M SIR = (1.36-1.15)/(1.36-1) = 58% – Reinsurer LR would be 2.3 times the cedant’s LR if SIR is not accounted for. Cont’d • Premium Calculation on Policies with Deductibles and ILFs – Deductible credits apply to the Basic Limits – Wrong: Prem = Base Rate x Ded Credit x ILF – Correct: Prem = Base Rate x (ILF - Ded Cr) • When is it reasonable to use B-F for pricing? – Other than for Loss Portfolio Transfers, which are essentially reserving analyses • B-F on top of B-F – using last year’s selected ultimate as this year’s expected – for pricing - what does B-F add? • Never credibility weight the B-F ULR with the Last year ULR. • Policy Limit Profiles – Available only by policy counts, not premium – To fix, multiply by ILFs – Example – Pol Limit – $250K – 1M Policy Count 1000 500 ILF 1.00 2.00 – Using policy counts, 1/3 of the exposure is at $1M – Taking the ILFs into account, 1/2 of the total exposure is at $1M • Deductible Limit Profiles not available • Trend analysis may be affected by changing limit profile • Rate Change History – Does not include changes in credits/debits – Changes in Exposure vs rate levels • Loss Development Triangle – only ground-up triangles – only net triangles available • Small volume of claims in the layer may cause distortion in the triangle development. • Negative development in gross triangle is tricky. • e.g. 12 Ground-up: clm#a 1,000 clm#b 0 ATA= 24 900 or 0 0.90 12 500 500 24 900 0 0.90 Excess of 400:clm#a 600 clm#b 0 ATA= 500 or 0 0.833 100 100 500 0 2.50 Cont’d • Simulation does not necessarily add value – Simulating directly off a large claim sample – Simulating per occurrence XOL from a fitted loss distribution – You get the same answer with a direct calculation • Simulation can be the best option – for example, contracts with drop down clauses, loss corridor, Annual Aggregate Ded • How many iterations are necessary? – If the answers is not stable, more iterations are needed • Garbage in- Garbage Out – Make sure inputs are reasonable • contract terms, frequency distribution, severity distributions ANTI-STRESS KIT BANG HEAD HERE Instructions 1. Place on firm surface. 2. Follow direction provided in circle. 3. Repeat until you are anti-stressed or become unconscious.