Culture Clash: US v Them Doug Lacoss CARe - London Casualty Pricing Approaches 16 th July 2007

16 July 2007 Casualty Pricing Approaches 2 Number of Qualified Actuaries Source: Tim Aman CARe presentation. 1. Actuaries.org 2. SOA.org 3. CAS.org

16 July 2007 Casualty Pricing Approaches 3 Source: T Aman CARe 2007 Actuaries.org, SwissRe.com, CAS.org, SOA.org Actuarial Saturation

16 July 2007 Casualty Pricing Approaches 4 Actuaries in Reinsurance

16 July 2007 Casualty Pricing Approaches 5 Reinsurance Actuaries – US v. Europe Number of Fellows + Associates in the US – 23,000 Percent of Non-life actuaries % Percent of Non-life actuaries in Reinsurance – 12.1% Number of Non-life, Reinsurance actuaries in US – 529 Number of Actuaries in Europe – 18,930 Percent of Non-life actuaries – 15% Percent of Non-life actuaries in Reinsurance – 18.62% Number of Non-life, Reinsurance actuaries in Europe Source: Tim Aman presentation CARe 2007, CAS website

16 July 2007 Casualty Pricing Approaches 6 Reinsurance Results Source: Benfield 2006 Reinsurance Renewal Report

16 July 2007 Casualty Pricing Approaches 7 Avoid the Valleys Rate monitor  Capture all business  Produce regular reports  Measure against exposure  Adjust for Terms & conditions Changes in coverage Varying limits / retentions Underlying rate changes

16 July 2007 Casualty Pricing Approaches 8 Adjusted Loss Ratios

16 July 2007 Casualty Pricing Approaches 9 Adjusted Loss Ratios

16 July 2007 Casualty Pricing Approaches 10 Adjusted Loss Ratios

16 July 2007 Casualty Pricing Approaches 11 Adjusted Loss Ratios

16 July 2007 Casualty Pricing Approaches 12 Avoid the Valleys Understand the risk  Discussion with underwriters  Discussion with cedents  Incidental classes matter  Read non-actuarial reports Underwriting submission Claims reports Trade press

16 July 2007 Casualty Pricing Approaches 13 Avoid the Valleys Locate the floor  Objective measurement  Unbiased analysis  Portfolio view

16 July 2007 Casualty Pricing Approaches 14 Avoid the Valleys Check for reasonable results  Applies to both experience and exposure rating  Include consideration of unknown risk

16 July 2007 Casualty Pricing Approaches 15 Testing XS Layer Projections Assumptions  Number of vehicles = 10 million  Average premium = 1,000  Total subject premium = 10 billion  Loss Ratio = 100% Selected XS Factor, above 1 million => 10%  Total Loss Cost above 1 million = 1 billion  Estimate an average excess loss cost, say => 2 million  Then the implied claim count = 500 Is this reasonable?

16 July 2007 Casualty Pricing Approaches 16 Celebrating Differences Different data available Different coverages Different pricing approaches

16 July 2007 Casualty Pricing Approaches 17 Different Data Available EUROPE In general, almost no market data available for Europe  Exception: Germany Amount of client specific data varies by country Even in “good” countries (UK), the data varies by company  Standard Motor market questionnaire Rate changes - Rate change info provided by cedent, sometimes with supporting calcs USA ISO collects data from all member companies  Loss costs, exposure curves Amount of data varies by company  Companies more open to reinsurer visits in the US Rate changes – Due to regulation, usually filed with state insurance departments, esp. personal lines

16 July 2007 Casualty Pricing Approaches 18 Different Data Insurance Service Organisations Data from member companies in US 90% of insurance premium in some lines Excess Loss Development ILF tools Very detailed info  By state  Rating class  Coverage

16 July 2007 Casualty Pricing Approaches 19 Different Coverages Motor (Auto)  In US, basic limits quite low  In Europe, unlimited liability exists Selby – Private motor claim Public Liability (General Liability)  Limits in US $1m/$2m, then umbrella on top  No umbrella in Europe, PL policies purchased to make total limit Employers Liability  In US, Workers’ Comp, 1 st party coverage, unlimited  EL is 3 rd party coverage, though standard of negligence has been eroded in many countries.  In UK, standard limit of £10m

16 July 2007 Casualty Pricing Approaches 20 Different Pricing Approach With no market data, reinsurers rely more on experience  Credibility of exposure rating is lower Experience Rating Issues  Small data sets – analysis of small, regional business is volatile from year to year; don’t overreact to random fluctuations  Note “free cover”, “unused layer” Make judgmental adjustment Fit distribution to limited losses, then extrapolate

16 July 2007 Casualty Pricing Approaches 21 Different Pricing Approach Exposure rating issues  Reinsurers attempt to build their own exposure curves  European “Countrywide” data is much smaller data set than US countrywide data  Data is not homogeneous*  High layers still based heavily on judgement*  Reliability of curves* *Some issues impact US curves also

16 July 2007 Casualty Pricing Approaches 22 Different Pricing Approach General Issues  Index Clauses Standard in Europe, rare in US  Cover including/excluding ALAE Mainly a US issue  Trend Unreliable information in some countries  Reinsurance Contract Structuring

16 July 2007 Casualty Pricing Approaches 23 Exposure rating Data set – loss triangles Can use data to estimate claims trend Get exposure data – premiums/ vehicle years Use exposures/losses to estimate frequency – poisson, neg bin Use loss size to estimate severity – pareto, lognormal  Use distributions for non-standard layers  Most loss severity data is not easily fit by curves  How to get ultimate shape for casualty?  Different claim costs by country make comparisons difficult