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2007 CAS Ratemaking Seminar
SPE-3 Actuarial Analysis of
Catastrophes & Terrorism for
Commercial Insurance
Rimma Maasbach - ISO
Terrorism Loss Costs
Topics
(1)
Overview of TRIA
(2)
Loss Costs – International
• Original (2002)
• Revised (2004)
(3)
TRIA
• Calculation of Federal Backstop Factors
(4)
Domestic Terrorism Pricing
Terrorism Pricing
Terrorism Risk Insurance Act of 2002
(TRIA) Overview
Terrorism Rating Overview
Line of Insurance Product
Derivation
• Commercial
Property
Loss Cost
AIR Model + ISO
Adjustment
• General Liability
• Commercial Auto
Percentage Loadings
To Current Loss Costs
ISO Modeling
• Businessowners
Combination of
Property and GL
• Other Lines
(e.g. CIM, Farm)
Refer to Company
Terrorism Rating
AIR Commercial Property Results
City/County
Rank
Loss Cost (Bldgs. & Cont.)
Manhattan
1
$.173
Chicago
4
.068
Seattle
8
.010
Marin County
36
.001
Terrorism Rating
Commercial Property Geographic Tiers
Tier
Cities/Counties
Approx. Loss
Cost
$.100
• High Hazard
NYC, Chicago, SF,
DC
• Medium Hazard
LA, Boston,
Houston, Phil.,
Seattle
.010
• Low Hazard
Remainder of USA
.001
Commercial Property
Adjustments to AIR Loss Costs
• Insurance – to – Value
– Divide by .80
• Nuclear/Bio-Chemical
– Multiply by 2.00
• Federal Backstop Factor
– Insurer Retained Losses  Total Terrorism Losses
• Loss Adjustment Expenses
– Add 5% of Adjusted Losses
Terrorism Pricing
Initial Terrorism Loss cost filings
Program Year 1 (2003) loss costs – Building coverage
Tier
Loss Cost
1
.108
2
.018
3
.001
Tier 1 – NYC, Chicago, DC, San Francisco
Tier 2 – Boston, Houston, LA, Philadelphia, Seattle
Tier 3 – Remainder of Country
WASHINGTON, D.C.
IMPLEMENTED TERRORISM LOSS COSTS
District of
Columbia
.030
20012
.018
20015
.008
20011
20016
20017
20008
20010
20009
20007
20064
20018
20059
20001
20057
20036
20005
20037 20006
#
20002
Washington
20019
20004
20004
20003
20024
20020
20032
Changes to AIR Model (2004)
1.
Revisions to Conventional Loss Estimates
•
•
Relatively small overall effect (10%) reduction)
Larger impact in certain zips/counties
2.
Nuclear, Biological and Chemical (NBC) Loss Estimates
•
Refined treatment estimates NBC losses on the same geographic
basis as conventional losses.
•
Replace the prior estimate which assumed NBC=Conventional
•
Compresses Loss Costs within Large Metropolitan Areas, i.e.,
smaller loss costs in the center city, higher loss cost in outlying
counties
AIR Terrorism Model
Commercial Property
Comparison of Annual Expected International
Terrorism Losses
2002 AIR Version
2004 AIR Version
Conventional
$1.45 Billion
$1.30 Billion
NBC
$1.45 Billion*
.95 Billion
Total
$2.90 Billion
$2.25 Billion
* Preliminary Estimate
Terrorism Loss Costs
Sample Impacts of Updated Model Version
Original Loss Costs
New Loss Costs
Location
Conv.
NBC
Comb
Conv.
NBC
Comb.
Downtown
$.100
$.100
$.200
$.090
$.020
$.110
Outlying
Area
.001
.001
.002
.001
.015
.016
Terrorism Loss Costs
Distribution of Conventional vs. NBC
Original Loss Costs
New Loss Costs
Location
Conv. %
NBC %
Conv. %
NBC %
Chicago
50%
50%
85%
15%
Lake Co., IL.
50
50
3
97
San Francisco
50
50
95
5
Marin Co., CA
50
50
1
99
Houston, TX
50
50
55
45
Revised Terrorism Loss Costs
New Geographic Tier Definitions
Tier
(a)
Nature
Definition (b)
Approximate #
1
By Zip
Loss Cost = $.10
~ 40 Zips contained in 4
cities
2
By City/County (c)
$.01 < Loss Cost <
$. 04
~ 80
3
By County (C)
Loss Cost < $.01
~ 70 with loss cost = $.005
remainder = $.001
(a) “Tiers” still have relevance for the purpose of backstop factor application.
(b) Loss costs are unadjusted for backstop.
(c) There are around 3200 counties in the US.
TRIA Federal Backstop Mechanism
Program Trigger:
Minimum Threshold for Total Industrywide
Loss
Insurer Deductible:
Each Insurer Pays 100% Under Deductible
(Determined based on % of prior year’s total
premium)
Coinsurance:
Insurer’s Share Above Deductible
Recoupment
Threshold:
Portion of Loss (after application of
Deductible & Coinsurance) below this
threshold to be recouped by Feds, via
Policyholder Surcharges
Program Cap:
Maximum Liability for [Industry + Feds]
Terrorism Risk Insurance
Extension Act (TRIEA)
Key Features
–
–
–
–
Two Additional years (2006 & 2007)
“Make Available” Requirement
International only (No Domestic)
Applies to Underlying Coverages only (e.g. No
Mandatory CBRN)
– Limited Lines of Insurance
• Property/Casualty Only
• Commercial Lines Only
• Some Commercial Lines Excluded
– Federal Backstop Mechanism Continues Unchanged
• But Parameters Have Changed
TRIEA Parameters
Comparison Across Years
2005
2006
2007
$5 Million
$50 Million
$100 Million
Deductible
15%
17½%
20%
Coinsurance
10%
10%
15%
Recoupment
Threshold
$15 Billion
$25 Billion
$27½ Billion
Program Cap
$100 Billion
$100 Billion
$100 Billion
Event Trigger
Lines of
Insurance
All Comm.
Lines except
Medical
Malpractice (&
Miscellaneous)
All Commercial Lines, except
Professional Liability,
Commercial Auto,
Farmowners, Surety (&
Miscellaneous.)
Calculation of TRIA
Federal Backstop Factors
• Calculate annual expected insured losses covered by the act –
mean and the 99%ile – fit lognormal and gamma distributions.
• Calculate industry deductible based on earned premium for the
prior year. % market share impacted increases with the size of
loss.
• Relative impacts – losses will not be distributed exactly
according to insurer’s market share. Assume each quintile
incurs an uneven percentage of losses – e.g., 10%, 15%, 20%,
25%, 30%.
• Calculate retained insured losses as a percentage of total
losses, subject to the $100B cap.
• Distribute average retention among tiers – greater impact for
Tier 1 with greater loss potential.
Certified Terrorism
Federal Backstop Factors
Tier
2005
2006
2007*
1 (High Hazard)
.75
.75
.80 – .85
2 (Medium Hazard)
.90
.90
.95
3 (Low Hazard)
.95
.95
.95 – 1.00
* Preliminary estimate based on latest version of AIR Model and
current methodology for calculating Backstop factors.
Commercial Property
Domestic Terrorism
Comparison of Annual Expected Losses based
on AIR’s Terrorism Model
2004
Domestic
2004
International
$155M
$1.30B
NBC
65M
.95B
Total
$220M
$2.25B
Conventional
Domestic as a percentage of International = 10%
Terrorism Pricing
Domestic Terrorism Loss Costs
AIR domestic terrorism loss costs for events $25M – no overlap
with smaller terrorism losses included in ratemaking
experience
Compared domestic terrorism loss costs to average commercial
property loss costs
Domestic terrorism loading included in Basic Group I loss costs
to achieve overall desired effect.
1.0% for Boston, Chicago, DC, Los Angeles and New York City
0.5% elsewhere
Commercial Property
Terrorism Pricing
Rimma Maasbach
[email protected]
201-469-2605