Transcript Download Handout 1

2004 CAS RATEMAKING SEMINAR
INCORPORATING CATASTROPHE MODELS
IN PROPERTY RATEMAKING (PL - 4)
ROB CURRY, FCAS
HURRICANE MODEL IN RATEMAKING
Why a Hurricane Model?
 Hurricane Modeling
 Use of Model Output in Homeowners Ratemaking
 Revisions of Model
 Other Uses of Model

TRADITIONAL EXCESS PROCEDURE
Based on historical insurance experience
 Split historical losses into normal vs. excess
 Calculate expected excess losses

» Use historical average
» Use many years
» Use regional data
» As a percentage of normal losses

Replace actual excess losses with long term
average
LIMITATIONS OF TRADITIONAL
PROCEDURE

Experience period too short
HURRICANE HISTORY
LONG-TERM FREQUENCY OF HURRICANES
FREQUENCY
3
ALL
INTENSE
2.5
2
1.5
1
0.5
0
1908
1916
1924
1932
1940
1948
Ten year moving average
1956
1964
1972
1980
1988
LIMITATIONS OF TRADITIONAL
PROCEDURE
Experience period too short
 Changes in conditions

CHANGES IN CONDITIONS
Growth In Population Density
PEOPLE PER SQUARE MILE
350
300
250
200
SE Atlantic
Coast
150
Total US
100
50
0
1960
1970
1980
1990
YEAR
2000
2010
LIMITATIONS OF TRADITIONAL
PROCEDURE
Experience period too short
 Changes in conditions
 Difficulty in allocating to territory

ADVANTAGES OF A HURRICANE
MODEL

A MODEL LINKS:
» 100+ years of meteorological data
» damageability relationships by construction type
» current distribution of insured exposure to risk
MODELING BASICS
Simulate type of
hurricane
 Estimate wind speeds
from simulated
hurricanes
 Estimate the damage
caused by those winds

HURRICANE MODEL

For each simulated hurricane a model:
» Establishes probability of occurrence
» Establishes storm path
» Determines wind speed at a site
» Determines damageability ratios (expected
damage/building value)

Calculates expected damageability ratios at a
location for all simulated storms
MODEL OUTPUT

Mean Damageability Ratios (MDR’s) by:
» zip code or portion of zip code in a territory
» building / contents / ALE coverage
» construction type
» single vs. multi-family homes
AGGREGATION OF ZIP MDR’s
NEED: Mapping of zip to ISO territory definitions
 HAVE: Database with insured house values by zip
and territory
 TERRITORY MDR’s:

» Calculate weighted average of MDR’s for individual zips
comprising territory
» For zip in multiple territories, allocate insured house
values among territories
SAMPLE OF HURRICANE MODEL
OUTPUT
TERRITORY CONSTRUCTION
A
B
--------------BUILDING
Single Family
CONTENTS
--------------ALE
Frame
.010
.008
.009
Masonry
.005
.003
.004
Superior
.001
.000
.001
Frame
.020
.015
.018
Masonry
.018
.012
.015
Superior
.005
.003
.004
SAMPLE CALCULATION OF
WEIGHTED MDR
Coverage
(1)
Relationship
To Cov. A
(2)
MDR
---(1) x (2)---
A
1.00
.010
.0100
B
.10
.010
.0010
C
.70
.008
.0056
D
.20
.009
.0018
Weighted
MDR
.0184
DEDUCTIBLE ADJUSTMENT
Model - percentage deductible
 Convert $250 to percentage deductible based on
average average amount of insurance
 Model - MDR’s based on percentage deductible

CALCULATION OF
HURRICANE LOSSES
MDR’s by Construction Type within Territory
 Hurricane Losses = MDR x Amount of Insurance
by Construction Type
 Territory Hurricane Losses = Sum over
Construction Types
 Statewide Hurricane Losses = Sum over Territories

REMOVAL OF HURRICANE LOSSES

Meteorological history
» storm tracks, 6-hour wind speeds




Model output showing wind speed contours
Need to know at what wind speed the model starts to
accumulate damage
Reported wind & water losses available
Manually remove hurricane losses
» Method varies by year based on level of detail available
– Newer years => by date of loss
– Exclude month of losses build back in average for month
– Older years => Exclude entire year
ADJUSTMENTS TO REPORTED LOSSES

For each of latest 5 Accident Years:
» REMOVE REPORTED HURRICANE LOSSES
» $250 Deductible
» Excess (Non-Hurricane) Wind Procedure
» LAE Factor
» Current Cost/Amount Factor
» Projection Factor
» Base Class Level
STATEWIDE LOSS COST
EXAMPLE
CALCULATION OF NON-MODELED INDICATED LOSS COST
Year
Projected
Losses
House
Years
Projected
Loss Cost
C&C
Factor
Projected
Year
Base LC Weights
1
$427,750
1,475
$290
1.160
$250
0.10
2
498,300
1,510
330
1.179
280
0.15
3
407,000
1,480
275
1.222
225
0.20
4
377,000
1,450
260
1.238
210
0.25
5
487,500
1,500
325
1.300
250
0.30
Weighted Non-Modeled Base Class Loss Cost = $239.50
STATEWIDE LOSS COST
EXAMPLE
CALCULATION OF HURRICANE LOSS COST
Amount of
Insurance
Hurricane Latest Yr. Aggregate
Losses House Yrs.
MDR’s
Territory
Avg. Hurr.
Loss Cost
%
A
10,000,000
2,000
200
0.02
10.00
B
20,000,000
40,000
300
0.20
133.33
C
100,000,000
100,000
1,000
0.10
100.00
SW
130,000,000
142,000
1,500
0.11
94.67
CALCULATION OF
HURRICANE LOSS COST
Statewide Hurricane Loss Costs from model
 Apply Latest Year Current Cost/Amount Factor
 Apply Projection Factor
 Apply LAE Factor
 Adjust to Base Class - Latest Year C & C Factor

STATEWIDE LOSS COST EXAMPLE
Calculation of Hurricane Loss Cost
(1)
Average Modeled Hurricane Loss Cost
(2)
LAE Factor
(3)
Latest Year Current Cost/Amount Factor
(4)
Projection Factor
1.05
(5)
Latest Year Class & Coverage Factor
1.30
Modeled Hurricane Base Class Loss Cost
(1) x (2) x (3) x (4) / (5)
94.67
1.15
1.005
$88.37
STATEWIDE LOSS COST EXAMPLE
Indicated Loss Cost Change
(1)
Weighted Indicated Non-Modeled Base
Class Loss Cost
239.50
(2)
Modeled Hurricane Base Class Loss Cost
(3)
Total Indicated Base Class Loss Cost
327.87
(4)
Current Base Class Loss Cost
300.00
Indicated Loss Cost Change
(3) / (4)
1.093
88.37
or
+9.3%
TERRITORY LOSS COST CHANGES
Distribute statewide change to each territory
 Compare combined non-modeled & modeled
experience by territory to statewide experience
 Adjust non-modeled loss cost to current year level

TERRITORY LOSS COST
EXAMPLE
(1)
Terr
(2)
(3)
(4)
(5)
NonNon-modeled
modeled
Current
Vol. Experience
Relativity
Wghts Loss Cost
to SW
Cred
(6)
(7)
(8)
Cred-Wtd
NonModeled
Loss Cost
Hurr.
Loss Cost
Total
Loss Cost
A
40%
300.00
1.440
.80
292.00
100.00
392.00
B
60%
100.00
.700
1.0
100.00
20.00
120.00
____
SW
________
$180.00
228.80
TERRITORY LOSS COST
EXAMPLE
(1)
(8)
(9)
(10)
(11)
(12)
Terr
Total
Loss Cost
Relativity
to SW
Current
Relativity
to SW
Indicated
Relative
Change
Indicated
Loss Cost
Change*
A
392.00
1.713
1.80
.952
+3.0%
B
120.00
.524
.50
1.048
+13.4%
____
________
_______
_______
SW
228.80
1.00
1.010
* Statewide Loss Cost Change = +9.3%
REVISIONS OF MODEL
Impact on Pending Filings
 Education on Detail of Revisions
 Evaluation of New Model Output for
Reasonableness

REVIEW OF MODEL
Consistent with guidelines in ASOP 38 (Using
Models Outside the Actuary’s Area of Expertise)
 Compliance with standards of Florida Commission
on Hurricane Loss Projection Methodology

Other Considerations
Level of geographic detail available to
run the model
 Insurance to value assumption
 Is current book of business
representative of future book?

OTHER USES OF MODEL

Pricing of relativities for secondary building characteristics
»
»
»
»

roof strength
roof covering performance
roof to wall strength
window strength
Territory Definitions