The Contest – Part I CAS Seminar on Ratemaking March 9-10, 2000 Session SPE-47 MIGHTY DUCK ACTUARIAL CONSULTANTS: Jerome E. Tuttle, FCAS St. Paul Re Stephen J. Talley, ACAS St. Paul Re

The Contest zWe decided to: yConcentrate on Standards yBorrow from Loss Reserves, especially xAAA Note on Reserve Opinions xBerquist & Sherman, PCAS 1977 yBe innovative, especially in cover letter and narrative yHave fun!

Cover Letter zQualifications of rate filer zIn my opinion these rates: yMeet requirements of Ins. Laws of Texas, incl. articles 5.01,...,21.81 yAre adequate, not excessive, not unfairly discriminatory yAre calculated based on accepted ratemaking standards & principles, including CAS Statement of Ratemaking Principles; ASB Standards 9, 12, 13, 23, 29, 30; textbooks & published papers zPeer review of rate filing zDisk with all exhibits as spreadsheets zPicture of duck as letterhead

Background Research zWe read CAS principles, relevant ASB Standards zWe read relevant insurance laws of Texas zWe browsed 20 years of CAS papers for potentially useful ones, and we referred to them zWe talked to actuaries, agents, claims folks, marketing folks, & underwriters, as a reasonability check on our assumptions zWe questioned the accuracy of the data, and did not use data we were unsure of

Unusual Things We Did zTriangulated CY Earned Premium zCalcd Incd Indication & Paid Indication zTempered a trend factor, justified in part from: yPeople we spoke with yPublished paper in another line zDecided certain expenses should not be passed on to insureds zAllocated expenses between fixed & variable, & between salary-based & non salary-based

Effect of 9/95 Tort Reform zWe interpret Texas Code Article 5.14 as follows: yA single loss reduction percentage of 11.4%, regardless of specific years in the ratemaking database. zWe spoke with people who feel the 11.4% is OK zBut this single percentage implies A/Y 96 losses should be reduced by 11.4%, even though it already reflects tort reform savings zWe complied with law, feel it conflicts with sound practice & disclosed our objection

Actuarial Adjustments

zPremium On-Leveling yTraditional parallelogram method impacted by changing level of exposures. yUse the discrete approximation offered by Frank Karlinski in his discussion of Miller and Davis paper, A Refined Model for Premium Adjustment. yGiven Written Premiums by Calendar Quarter, calculate Earned Premiums by Calendar Year. yGiven Rate Level by Calendar Quarter, calculate weighted average Rate Level by Calendar Year using Earned Premium as weights.

Actuarial Adjustments

zFrequency Trend yFrequency = Paid Counts / Earned Exposures. yDistorted when level of exposures is changing. yCompare Assigned Risk Frequency Trend with Voluntary Market Frequency Trend. yAdjust Assigned Risk Data to account for changing level of exposures.

Assigned Risk Data

Voluntary Market Data

Actuarial Adjustments zFrequency Trend (BI) yLag exposures using paid loss pattern. Try to match paid counts with the exposures that generated counts. x158,839 exposures written in 1st quarter of % earned between 1st quarter 93 and 1st quarter % earned between 1st quarter 94 and 1st quarter % earned between 1st quarter 95 and 1st quarter 96. x7,942 exposures earned in 1st quarter of 93 from exposures written in 1st quarter of 93. (158,839 x x 0.4) xFor each calendar quarter, sum earned exposures from all exposure- writing quarters.

Adjusted Assigned Risk Data

Actuarial Adjustments zFrequency Trend yUnadjusted Assigned Risk Data indication [18.5%, 22.8%] yVoluntary Market Data indication [0.1%, -3.7%] yAdjusted Assigned Risk Data indication [-5.6%, -24.0%] ySelect -6.5% through 12/31/97.

Actuarial Adjustments zFrequency Trend yConsiderations: xUsing Paid Loss development pattern to estimate Paid Count development pattern. xEffect of Tort Reform in later data points. xQuality of Assigned Risk insureds worsening over time.

Actuarial Adjustments zFrequency Trend xPD not as distorted by changing exposure level. xPIP and UM Assigned Risk Data indications not credible. xUsed voluntary Market Data indications for PIP and UM.

Actuarial Adjustments ySeverity Trend xDistortion of changing exposure levels not as severe as for frequency. xFor BI & PD, indications from voluntary and assigned risk data are similar. xPIP & UM not credible - used voluntary indication.