Risk Integration, Aggregation & Correlation: Domino Effects Chet Szczepanski Chief Actuary Pennsylvania Insurance Department.

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Presentation transcript:

Risk Integration, Aggregation & Correlation: Domino Effects Chet Szczepanski Chief Actuary Pennsylvania Insurance Department

Pennsylvania Experience PIC Reliance PHICO Legion SWIF Special Funds Medical Malpractice

Pennsylvania Experience PIC: Medical malpractice writer Discounted reserves Reserve deficiencies Downgraded Doctor’s did not care Speed Up in Court Decision RBC caught them!

Pennsylvania Experience Reliance Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Heavily leveraged by holding company debt

Pennsylvania Experience Reliance (continued) Unicover Reserve deficiencies Downgraded Liquidity, liquidity, liquidity

Pennsylvania Experience PHICO Medical malpractice writer Rapid expansion into new markets Reserve deficiencies Downgraded Doctors did not care Liquidity not a problem

Pennsylvania Experience Legion Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Downgraded Reserves? Liquidity, liquidity, liquidity

Pennsylvania Experience Common Themes: Reserve deficiencies Ratings downgrades Reinsurance Liquidity

Pennsylvania Experience SWIF Consistently a leading writer of WC in PA Often the leading writer Market share has varied from 5% to 15% (currently about 13%) Dramatic premium growth to almost $500 Million in 1994 then precipitous drop but now on the rise

Pennsylvania Experience SWIF

Pennsylvania Experience Medical Malpractice

Pricing implication when expected yields drop from 7% to 4%?

P&C Industry Asset Distribution for 2001

P&C Industry Invested Asset Distribution for 2001

Reinsurance Leverage

Add rating sensitive business Mix in a downgrade $1,000,000,000 or more in Statutory Deposits $500,000,000 in one Stock Liquidity?

Reinsurance Leverage

Equity Leverage

Conclusions? Risk elements always exist Some are naturally occurring Some are artificially created Interactions can lead to disastrous results

Insight? Risk elements must be identified and managed!