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Pricing Excess and Surplus Lines
(COM-4)
Ronald J. Herrig, FCAS
Markel Corporation
Deerfield, Illinois
What Is
the
Surplus
Lines
Industry?
The Surplus Lines industry
provides a market for hard-toplace risks; risks the standard
market chooses not to write.
Why are these risks not written
by the standard market?
•
Distressed
Risks/Markets
•
Unique Risks
•
High-Capacity Risks
Distressed Risks – Something about the risk itself
that makes it undesirable to the standard market.
• Start-Up Manufacturer – No track record
• New Physician
• Physician with a History of Drug-Abuse
Distressed Markets – Something about the
entire category of risks that makes it undesirable to the standard market.
• OB/GYNs - SOL
• Junk Yards
• Nutritional
Supplements – What’s the
new Ephedra?
Unique Risks – Characteristics of the
risk make it too unusual to fall
within standard U/W classes.
• Fireworks Accounts
• Shamu Transportation
• Architectural Projects
High-Capacity Risks – Risks needing high
limits of protection and in-depth underwriting
• High Rise Buildings
• Directors & Officers
• Aviation
Property/Liability
How Can Surplus Lines
Companies write this Junk
(Profitably)?
By being Fast, Fluid and
Flexible!
Regulation
• No need to file
rates/forms
• Licensing required
only in state of
domicile
• Not an unregulated
industry, though
Regulations That Do Apply
• Annual Statements
• Triennial Reviews
• Market Conduct Exams
• Risk-Based Capital Requirements
• SEC Requirements
Adaptable Policies
• Claims-Made Coverage
• ALAE included within Limits
• Sublimits
• Customized Endorsements
And most importantly…
Expert Underwriting
Underwriters need:
• to understand their
company’s appetite for
risk – and abide by it
• knowledge of book’s
underlying statistics
• to understand each
insured and its
associated risks
Claims Handling
• Knowledgeable Claim
Handlers
• Standardized
Approach to Claims
Reserving
• Consistent Approach
to Claims Reserving
Effects of the Market Cycle
Hard Market and E&S
•
Admitted Companies become more
selective.
•
Surplus Lines applications increase
dramatically.
•
Rates Firm, Coverages Contract.
•
Small Decrease in Admitted Market
can increase Non-Admitted Market
Substantially.
Change in Applications
(2000 Baseline = 100 units)
350
300
250
2000
2001
2002
2003
2004
200
150
100
50
0
Products
Med Mal
Soft Market and E&S
•
Admitted Companies
become less selective in
their Underwriting.
•
Fewer Risks are
Declined.
•
E&S companies develop
new products to
maintain volume.
Examples of New Products
• Employment Practices
Liability
• Tenant Discrimination
• Environmental
Impairment Liability
EPLI
(1994 Baseline = 100 units)
45000
40000
35000
30000
25000
E.P. (000)
20000
15000
10000
5000
0
1994
1996
1998
2000
2002
2004
New Product Development
1. Opportunity
identification
2. Product design
3. Testing
4. Product introduction
5. Life-cycle
management
Opportunity Identification
• Broker
Recommendations
• Marketing
• New Product Teams
• Media
Product Design
• Target Market
• Coverages
• Policy Wording
• Rating
Testing
• Beta-Test on Select
Market
• Honest Feedback
• Rate, rate, rate
Ratemaking Methods
Ratemaking Methods
for New Products
•
Pure Premium Methods
•
Piggy-back Method
•
Festus Method
Pure Premium Methods
1. Ultimate Losses / Ultimate Exposures
2. Frequency x Severity
Pure Premium Methods
1. Trend individual ‘ground-up’ losses;
remove base deductible
2. Develop losses; cap at basic limit
3. Aggregate all adjusted losses.
Pure Premium Method
Treatment of Exposures
1. Multiply individual units of exposure by
applicable relativity factors (state, class
code, claims-made step-rate, etc.)
2. Aggregate all adjusted exposures
Pure Premium Method
Calculation of Rate
Pure Premium =
Aggregate Adjusted Losses
Aggregate Adjusted Exposures
Base Rate = Pure Premium
Permissible L/R
Pure Premium Method
• Works well for an existing product
• Works best for a product with a welldefined exposure base (doctors, employees)
• Requires detailed loss and exposure info
(claim-by-claim, policy-by-policy)
• Actuarially sound
Piggy-back Method
1. Start with Comparable Product
2. Adjust Rates for Coverage
differences
3. Adjust for Limits/Deductible
differences
4. Adjust for Expense differences
5. Others?
Piggy-back Method
• Works well for Enhancement of Existing
Product
• Requires knowledge of Comparable Product
• Judgmental
• Danger of being too
Conservative/Aggressive?
• Difficult to Support to Others
The Festus Method
The Festus Method
Ratemaking Tools
• Imagination!
• Innovation!
• Intuition!
• Internet!
Useful Sites
• www.google.com – Big Brother is
Watching!
• www.firstgov.gov - U.S. Government’s
Official Web Portal
• www.bls.gov - Bureau of Labor Statistics
• www.federalreserve.gov - Interest Rates
Other Useful Websites
• www.cas.org
• www.cnn.com
• Where ever else the web may take you!