Transcript Download Handout 2

Terrorism Ratemaking Methods
for Workers’ Compensation
2004 CAS Ratemaking Seminar
Mary Gaillard
AIG
March 11, 2004
Unique Challenges Associated
with TRIA
• Federal regulation with deductible that
applies to all states, all designated TRIA
lines
• Lack of relevant historical data to use for
making rates
• Frequency, severity, location, and nature of
future events unpredictable
TRIA Deductible
• 7% of 2002 Direct Earned Premium - 2003
• 10% of 2003 Direct Earned Premium - 2004
• 15% of 2004 Direct Earned Premium - 2005
• Deductible is determined by all TRIA lines,
whether or not coverage for terrorism is
purchased
In the event of a terrorist attack,
what is the “loss” under TRIA?
• Maximum loss to Company A under TRIA
is the Company’s deductible for that year
plus 10% of losses above the deductible.
• The total loss payable for one or more
events by insurance companies and the
federal government combined is capped at
$100 Billion in any one year.
Actuarial Literature Regarding
Ratemaking Guidelines
• Statement of Principles Regarding Property
and Casualty Insurance Ratemaking
• “Report to NAIC Terrorism Insurance
Implementation Working Group on
Ratemaking Issues Related to the Terrorism
Risk Insurance Act,” prepared by the P/C Extreme
Events Committee, American Academy of Actuaries,
March 4, 2003
Statement of Principles...
• “A rate is an estimate of the expected value
of future costs.”
• “Considerations” that do not apply:
organization, homogeneity and credibility
of available data
• “Considerations” that may apply: other
influences, risk, actuarial judgment
AAA Report to NAIC….
• “Since traditional ratemaking methods will not work for
developing rates for the risk of foreign terrorism, insurers
must rely on their own judgment and that of terrorism
experts to develop rates. In fact, judgment, including
judgment about the the selection of historical data, is a
critical part of all ratemaking. Because of the limited
amount of data available for terrorism ratemaking,
judgment becomes the overriding factor.”
Funding the TRIA Deductible
Approach
• Determine rates for terrorism by line and by
state in order to collect enough premium to
fund the deductible over a reasonable period
of time
Workers’ Compensation and
TRIA
• Compare Terrorism pricing as a percent of
premium to percent of payroll
Example: State X for Company A
• Determine need, say, 4% of premium for
WC
• Compare expected revenue using bureau
rate per $100 of payroll. Assume rate of .03
• Using Company A distribution by class,
calculate rate per $100 of payroll that
generates 4% of premium.
Rating Examples
Class 8810 - Clerical
Payroll
Class Rate
Class Premium
TRIA Charge
TRIA Premium
NCCI Payroll Method
Bureau Revenue Target
Company A Revenue Target
2,857,143
2,857,143
0.35
0.35
10,000
10,000
0.030
0.100
% of Premium Method
2,857,143
0.35
10,000
4%
857
2,857
400
10,857
12,857
10,400
495,050
2.02
10,000
0.030
495,050
2.02
10,000
0.100
495,050
2.02
10,000
4%
149
495
400
Total Premium
10,149
10,495
10,400
Class 5057 - Iron or Steel Erection
Payroll
Class Rate
Class Premium
TRIA Charge
52,247
19.14
10,000
0.030
52,247
19.14
10,000
0.100
52,247
19.14
10,000
4%
16
52
400
10,016
10,052
10,400
Total Premium
Class 8017 - Retail Store
Payroll
Class Rate
Class Premium
TRIA Charge
TRIA Premium
TRIA Premium
Total Premium
TRIA Rating Examples
3,000
Payroll Method - Bureau
Revenue Target
2,500
Premium
2,000
1,500
1,000
1,000
857
500
149
16
0
TRIA Deductible
Class 8810 - Clerical
Class 8017 - Retail
Store NOC
Class 5057 - Iron or
Steel Erection NOC
TRIA Rating Examples
3,000
2,857
Payroll Method - Bureau
Revenue Target
2,500
Payroll Method - Company
A Revenue Target
Premium
2,000
1,500
1,000
1,000
857
495
500
149
16 52
0
TRIA Deductible
Class 8810 - Clerical
Class 8017 - Retail
Store NOC
Class 5057 - Iron or
Steel Erection NOC
TRIA Rating Examples
3,000
2,857
Payroll Method - Bureau
Revenue Target
2,500
Payroll Method - Company
A Revenue Target
% of Premium Method
Premium
2,000
1,500
1,000
1,000
857
495
500
400
400
400
149
16
52
0
TRIA Deductible
Class 8810 - Clerical
Class 8017 - Retail
Store NOC
Class 5057 - Iron or
Steel Erection NOC
Advantages of the Percent of
Premium Method
• Appropriately reflects the difference in
benefit levels by state
• Distributes dollar charge by classification
more evenly than rate per $100 payroll
• Direct correlation of the charge for
terrorism to the increase in the TRIA
deductible