Download Handout 2
Download
Report
Transcript Download Handout 2
2005 CAS Ratemaking Seminar
Pricing and Market Conditions:
Financial Lines
Measuring Risk for D&O Liability
Ben Fidlow, FCAS, MAAA
Executive Protection (D&O) Risks
Securities Class Action Lawsuits
Brought by shareholders themselves
Derivative Actions – Brought by shareholders on behalf of the
company itself
Individual Shareholder Lawsuits
Employment Practices Litigation
Other Third-Party Lawsuits (government/regulators, competitors,
clients/customers)
March 2004
CAS Ratemaking Seminar
2
Biggest Risk = Securities Class Actions
Exposure Base – Total Assets, Revenue, Market Capitalization
Pricing – Current market cap, 52-week high MC, moving averages,
historical price dips
Reserving – Class period MC loss, event MC loss, maximum dollar
loss, bounce-back effect, loss relative to the market as a whole
Expectation is the Key
How to measure it?
When is it misplaced?
March 2004
CAS Ratemaking Seminar
3
Securities Class Action - Data Issues
Lack of Loss and Exposure Data
Anomalies
IPO Laddering
Analysts
Mutual Fund Scandal
Insurance Bid-Rigging
Median vs. Mean
Market Cap Loss
Settlements
Historical Financial Data
Mergers
Bankruptcies
Settlement Amounts vs. Actual Insurer Losses
March 2004
CAS Ratemaking Seminar
4
Actuarial Science – Where Do We Fit In?
Not Easy – Why? Parameter Risk
Price Monitoring
Renewal Analysis
– Premium per million of limit (Rate Per Million)
– Adjust for attachment, change in market cap, coverage terms
– Changes in perceived risk levels
– Exclude certain accounts
Non-renewals
Overall portfolio
Monitor specific pricing statistics
Assist Underwriting
Set benchmarks, minimums
Actuarial input into rating plans
Black Box
Explicitly recognize and define risk characteristics
March 2004
CAS Ratemaking Seminar
5
D&O Actuarial Science – Specifics
Trend
Frequency – Look at number of filings, what is the universe of publicly
traded companies?
Severity
– Consultants and other agencies track settlements by Settlement
Year
– Analysis should be done by Filed Year
• Equity run-up of the late ‘90s and subsequent bubble burst
• Downward bias (bigger claims take longer to settle)
– Annualized Factor
– Risk Segmentation
– Limits Usage
Need to reflect current economic environment
March 2004
CAS Ratemaking Seminar
6
Correlation to Market Cap Loss
Class Action Settlements - Examples
Case
Filed
Year
Settled
Year
Settlement
Amount
Settlement %
of MC Loss
Amgen
1998
2000
1,000,000
0.2%
Mattel
1999
2002
122,000,000
2.5%
Sykes Enterprises
2000
2003
30,000,000
6.7%
Dollar General
2003
2003
10,500,000
0.9%
Columbia/HCA
1997
2004
49,500,000
-4.2%
Market Cap Loss is measured as the loss over the entire class period
March 2004
CAS Ratemaking Seminar
7
Settlements - Filed Year vs. Settlement Year
45,000,000
40,000,000
35,000,000
30,000,000
Filed Year
25,000,000
Settled Year
20,000,000
Log. (Filed Year)
15,000,000
Log. (Settled Year)
10,000,000
5,000,000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Data as of 6/01/04
March 2004
CAS Ratemaking Seminar
8
D&O Actuarial Science – Specifics
Severity Distributions
Rate on Line – Excess pricing should be mathematically, not
competitively driven
Segmentation into Homogeneous Groups
– Market Cap Size
– Industry
Companion Suits (Institutional Investor)
Other D&O Claim Types
March 2004
CAS Ratemaking Seminar
9
Segmentation – Average Settlements by Filed Year
300,000,000
250,000,000
200,000,000
Small Cap
150,000,000
Large Cap
100,000,000
Mega Cap
50,000,000
0
1996 1997 1998 * 1999 2000 2001 2002 2003 2004
Data as of 6/01/04
* 1998 Mega Cap amount limits Cendant to $500M
March 2004
CAS Ratemaking Seminar
10
Segmentation – Average and Median Settlements by Filed Year
300,000,000
250,000,000
Small Cap
Average
200,000,000
Large Cap
Average
150,000,000
Mega Cap
Average
Small Cap
Median
100,000,000
Large Cap
Median
50,000,000
Mega Cap
Median
0
1996 1997 1998* 1999 2000 2001 2002 2003 2004
Data as of 6/01/04
March 2004
CAS Ratemaking Seminar
* 1998 Mega Cap Average amount limits Cendant to $500M
11
Questions?