Transcript How To Get The Biggest Bang For Your Reinsurance $$ CAS Spring Meeting May 17, 2004 Moderator: Karen Pachyn, Sr.

How To Get The Biggest Bang
For Your Reinsurance $$
CAS Spring Meeting
May 17, 2004
Moderator: Karen Pachyn, Sr. V.P., & Chief Actuary
GE Reinsurance Corporation
Panelists: Michele Bernal, Chief Actuary – Direct Treaty
American Re-Insurance Company
Daniel Carberry, V. P.
Benfield, Inc.
1
How to Get the Biggest Bang for Your Reinsurance Buck
•
Make Sure Your Reinsurer Understands What’s Happening
With Your Business
•
Give Him/Her Data to Demonstrate It
2
Discussion Topics
•
General Issues Given Where We Are in the Market
•
Importance of Price Monitoring
•
Loss Development Issues
•
Line of Business Issues
- Umbrella
- Work Comp
- Contractors/Construction Defect
- Property
•
Special Issues Surrounding Cat and Terrorism Exposures
3
General Issues
•
Reinsurers Use Two Basic Pricing Approaches
- Experience Rating
- Exposure Rating
•
Also Want to Know Current/Projected Rates
4
General Issues
•
Reinsurers Rely Heavily on Historical Data
- How Does This Compare to Your Going Forward Book
-
In Hard Market, Favorable Changes Made

May Not Be Evident in Standard Data Request
-
Help Reinsurer Understand These Changes

What Were They

How Will They Impact Your Loss Ratio

What Data Can You Provide to Support That
5
General Issues
•
Common Changes in Hard Market
-
We No Longer Write in State X

Provide Data by State
-
We Cancelled a Bunch of Agents

Provide Data for Those Agents Vs. Others

Explain Why Business Won’t Just Go to Agent Across the Street
-
We Got Out of Classes of Business

Provide Data With and Without Those Classes

Why Those Classes?

Prove It Wasn’t Just Bad Luck That Caused the Classes to Be Bad
-
We’ve Changed Our Underwriting Standards

What Changes Were Made

What Percent of the Business Do They Impact

Why and How Will That Improve the Loss Ratio
6
General Issues
•
How to Get the Reinsurer to REALLY Buy Into What You Are
Telling Them
- Give Them a History of at Least 5 to 6 Years, Not Just Last Year
Vs. This Year
-
Provide Premium PLUS Loss Data
-
Have Direct Actuarial Discussions
-
Make Sure the Data Ties to Other Exhibits/Balances/Makes Sense
7
Importance of Price Monitoring
8
Importance of Price Monitoring
•
Cleanest Is Filed Manual Rates in One Company
- Ideally Filed Rate Changes
- Changes in Loss Costs, Loss Cost Multipliers
- Deviations off Rates?
- Inflation Sensitive Exposure Base?
- Changes in TIV?
9
Importance of Price Monitoring
•
Complications
- A-Rated Business
- Non Admitted Carrier
- Tiered Rate Levels – Multiple Companies
10
Importance of Price Monitoring
•
A Good Price Monitoring System:
- Measures Premiums Charged Year Over Year
- Adjusts for Changes in Number of Exposure Units
- Adjusts for Changes in Limits, Deductibles, SIR’s, Etc.
- Adjusts for Changes in Coverage
- Captures a Significant Portion of Renewals
- Measures New
11
Importance of Price Monitoring
•
Price Monitoring Example:
Renewing Prem. Expiring Prem. Price Change
All Policies
$ 30,450,000
$ 24,975,000
22%
Policies w/ Eq. Terms
21,125,000
18,500,000
14%
Exposure Base
20,950,000
23,145,000
Price Per Exposure
1.453
1.079
35%
12
Importance of Price Monitoring
•
Price Monitoring
-
Best Approach – Rerate This Year’s Policy at Last Year’s Rates

Captures Changes in Limits, Exposures, Etc.

Way to Measure New Business

Time Consuming – Automated

If Debits or Credits Judgmental, How Do You Accurately
Capture That?
13
Loss Development Issues
• Reserving Cycle
• Nature of Large Losses
14
Loss Development Issues - Reserving Cycle
• Increases in Incurred Loss Development
• Big Question : What Will Development Be in the Future?
• Three Possibilities:
- Higher? – Maybe the Higher Development Is Due
to Increased Inflation – Case Reserves Are Just
Barely Keeping Up, and Incurreds Will Increase
More in the Future
- Lower? – Our Reserves Are Much Stronger Than
They’ve Been in the Past, So Future Development
Will Be Less
- Somewhere in Between? – If So, Where?
15
Loss Development Issues - Reserving Cycle
How Do You Know?
What Can You Do?
What Will Your Reinsurer Do??
16
Loss Development Issues – Reserving Cycle
• How Strong Are the Reserves?
- Provide Triangles of Paid/incurred Ratios
- If Reserves Are Stronger Than Historical, Ldf’s Can
Be Adjusted Downward
• Are Losses Being Distorted by Timings of Claims
Closings or an Increase in Settlements?
- Provide Triangles of Closed Claims and Reported
Claims to See % of Claims Remaining to Be Closed
- If More Claims Closed Than Historical, Tail Can Be
Reduced
• Is It Inflation or Just Reserve Strengthening?
- Provide Paid or Closed Losses/closed Claims
17
What About Large Claims?
18
Loss Development Issues – Large Claims
• Important to Understand Differences Between How
Small and Large Claims Are Reserved
-
Different Department?
-
Are Initiatives That Impact Aggregate Losses
Impacting the Large Losses in the Same Manner?
19
Loss Development Issues – Large Claims
• Leveraged Impact of Development on Excess Losses - WC
Percentage of
Ultimate
Primary vs Reinsurer
(Source: RAA / AM Best)
100%
80%
60%
40%
20%
0%
1
2
3
4
5
6
7
8
9
10
Report Period (Years)
Primary
Reinsurer
20
Loss Development – Large Claims
Cumulative Reported Loss Development
Variations in Excess Development
Work Comp – 500k X 500k
6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
36
48
60
72
84
Months of Development
96
--- Harmonic Mean --- 75th %ile
21
Loss Development Issues – Large Claims
What Can I Do?
•
Important to Track Large Claim Data at Historical
Valuations
- E.G., Each Year-end Since Reported.
• Reinsurer Can Build Loss Development Triangles
for On-level Excess Losses
22
Line of Business Issues
23
Line of Business Issues - Excess and Umbrella
•
Historical Experience
- Loss Listing

Umbrella Limits Associated With Loss

Underlying Limits

Line of Business

Underlying Carrier

Signal Reserves Vs. Other

Most Recent Evaluation As Well As Prior Evaluations
24
Line of Business Issues - Excess and Umbrella
•
Historical Experience
- Premium Trends – Want to Get Full Credit for Big Increases!

From Price Monitoring

Support for Trends
Minimum Premiums – When and How Much
Auto Unit Rate Changes
Factors for First Million As % of U/L
Factors for Subsequent Millions
Credits or Debits Allowed
Handling of Underlying Rates
Trends in Underlying Rate Levels
Average Premiums Per Million Changes
Admitted Vs. Non Admitted

Current and Future Rate Levels & Strategies for Achieving

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
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




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Line of Business Issues - Excess and Umbrella
•
Historical Experience
- What Else Is Different Today Vs. Yesterday
- Attachment and Limits Point Profiles – Current and Historical
- Mix of Supported Vs. Unsupported
- Type of Risks in Portfolio
26
Line of Business Issues - Excess and Umbrella
•
More on Limits Profiles
- Matrix Format
Attachment Point 1000 2000 3000 4000 5000 10000 Total
300
5%
5%
500
8% 12%
20%
1000
43% 15% 7% 5% 3%
2% 75%
Total
56% 27% 7%
5% 3%
2% 100%
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Line of Business Issues - Excess and Umbrella
•
More on Limits Profiles
- Individual Policy Listing
Insured
U/L Carrier U/L Limits X/S Limits CC’s Share LOB
Krispy Crunchies Feelings Mut.
Colorado Dreams ABC Ins. Co.
•
•
•
•
•
•
•
•
•
•
•
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5000
1000/2000
•
•
•
•
25000
5000
•
•
•
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10%
100%
•
•
•
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Auto
Prod.
•
•
•
•
28
Line of Business Issues – Workers Comp
• Are Claims “Discounted”?
- They All Are

Medical Inflation Is Not Contemplated

Mortality Tables in Stat Plan Have State-specific
Discount

Discount for Reduced Life Expectancy

Most Claims People Aren’t Aware of This
“Discount”

The Difference in Reserve Levels Is the Degree of
“Discount”.
29
Line of Business Issues – Workers Comp
• Impact of Settlements
- Some States More Accommodating
- Some Companies More Aggressive
- Paid Development Up
- Incurred Development Down
• Provide # of Settlements and Size by Year
- Reinsurer Can Adjust Tail Downward
30
Line of Business Issues – Workers Comp
• Benefit Changes Impact Different Claims Differently
- California
 AB749 – Significant Increases in Permanent Total
Benefit Levels

SB899 – Significant Savings in Aggregate Losses
and Average Medical Losses; Impact on Severe
Claims Uncertain

Net Effect on XS Loss Rates?
• Separation of Data Between Medical, Indemnity and
ALAE Can Improve Accuracy of Projections on a 1st
Dollar Basis.
31
Line of Business Issues – Workers Comp
• Premium Issues
- Treatment of Retro Premiums
 Prior Year AP’s Usually Included in Current Year EP
 Provide Estimate of Historical & Prospective
Adjustments, or
 Use Standard Premium As a Subject Base?
 Make Sure Contract Wording Is Clear
- Treatment of Audit Premiums
- Treatment of Dividends
32
Line of Business Issues – Contractors
• Important to Track Historical Timing of
Changes in Forms
• Helpful If Claims Not Covered Under New
Forms Could Be Identified
33
Line of Business Issues - Property
•
Special Considerations for Excess Per Risk Covers
- Exposure Rating

PSOLD Expects Limits to Be Building and Contents Only

Limits Should Be on a Per Location Basis

Excess??
34
Data And Property Catastrophe
Reinsurance Pricing
35
Data And Reinsurance Pricing
Agenda
•
Catastrophe Reinsurance Pricing Overview
•
Loss Variability
•
Terrorism Coverage Considerations
•
Conclusions
36
Catastrophe Reinsurance
Pricing Overview
37
Catastrophe Reinsurance Pricing
Basic Pricing
•
Premium = Modeled Pure Premium To Layer +
Factor Of Standard Deviation
•
Capital Allocation, Return On Equity At PML Level
•
Dependent On Modeling
38
Catastrophe Reinsurance Pricing
Other Considerations
•
Existing Capacity By Region
•
Loss Experience
•
Lead Markets
•
Prevailing Rate On Line For Business Segment
•
Quality Of Data Available
- Reinsurer Will Make Conservative Assumptions
39
Catastrophe Reinsurance Pricing
Data Typically Provided To Reinsurers
•
Model Inputs And Outputs
•
UNICEDE Data
•
Modeling Summary
- Explanation Of Changes From Previous Year
- Narrative On Expected Changes Going Forward
•
Catastrophe Loss Experience
40
Loss Variability
41
Loss Variability
Catastrophe Models
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Three Widely Accepted Models Used In The
Insurance Industry
•
All Produce Different Results
•
Models Change
•
Reinsurers Are Using All Of Them
•
Catastrophe Models Are Not Good At Checking
Validity of Data
42
Loss Variability
Data Quality
•
Aggregate Vs. Policy Level
•
Street Address Vs. Zip Code
- Personal: 90%+ Street Address
- Commercial: 50-75% Street Address
- Automobile: Almost Always ZIP Code Aggregate
•
Use Of Unknowns
- Construction, Occupancy, Year Built, Number Of Stories
43
Loss Variability
Data Quality
•
Application Of Deductibles
•
Insurance To Value And Guaranteed Replacement Cost
•
Data As Of Date
44
Loss Variability
Data Quality
•
All Data Captured?
•
Inclusion Of Facultative Or Surplus Share Data
•
Bulk Coding Of Commercial Locations
•
Number Of Buildings
•
Scheduled Property (Inland Marine)
45
Loss Variability
Other Factors
•
Demand Surge
•
Storm Surge
•
Allocated Loss Adjustment Expenses
•
Law/Ordinance Coverage
•
Inuring Reinsurance
46
Terrorism Considerations
47
Terrorism Considerations
Data Available
•
Property Data – Usually Available From Catastrophe
Modeling Exercise
•
Worker’s Compensation Data – Harder To Collect
At Useful Level Of Detail
•
Object Is To Evaluate Exposure To Clash Loss
48
Terrorism Considerations
Tools Available
•
Accumulation/Concentration Analyses
•
Probabilistic Models
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Deterministic Models
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CONCLUSIONS
50
Conclusions
Technical Considerations
•
Data Quality And Models Used Affect Catastrophe
Loss Estimates
•
Catastrophe Loss Estimates Are The Foundation Of
Reinsurance Pricing
51
Conclusions
Non-technical Considerations
•
Prevailing Market Conditions Matter
•
Quality Of Data Affects Confidence
- Quality of Data Can Differentiate You In The Market
-
Reinsurers Will Deploy Capacity Where They Are Most
Comfortable
-
Good Data Demonstrates You Know Your Exposure
52
Conclusions
What Should You Do?
•
Review Data Capture Regularly
•
Make Front End Systems Easy For User
•
Data Programmer Should Understand Exposure
•
Involve Catastrophe Modeler In The Data Process
•
Maintain Controls Across The Process
- Control Totals
- Modeling Assumptions
53
Conclusions
What Should You Do?
•
Provide Data For Revised Underwriting Guidelines
- Deductibles
- Geographic Restrictions And/Or Growth
•
Run Multiple Models Periodically
•
Consider Mid-Year Reinsurance Rate Adjustment
•
Eliminate As Many Questions As Possible
54