Agenda Introduction to Credibility Difference between Policy Year, Accident Year, and Calendar Year Relationship Between Accident Year and Calendar Year Loss Ratios My Experience as a Casualty Actuary

Credibility The degree of reliability an observed body of data has to predict its future expected losses Varies from Zero to Full Increases as the size of the body of data increases due to the law of large numbers Examples: –Zero Credibility – Individual Auto Experience –Full Credibility – Statewide Auto Experience of a Large Carrier –Partial Credibility – IL Auto Experience for 19 year old unmarried males in Territory 1

Review of Policy, Accident, and Calendar Year Methods How are premium and loss statistics complied under the following methods? Policy Year Accident Year Calendar Year

Calendar Year vs. Policy Year Earned Premium $10,000 Policy Written on 4/1/2001 Year Policy Yr EPCal. Yr EP Policy Yr EPCal. Yr EP 2001$7,500 $10,000$7, $0 $2,500

Calendar Year, Policy Year & Accident Year Incurred Loss On the policy effective 4/1/2001 two claims occur: Claim #1: Accident Date 9/23/01 Reserve set at $2,000 on 10/1/01 $3,000 Paid and Claim Closed on 8/1/02 Claim #2: Accident Date 3/30/02 Reserve set at $3,000 on 4/15/2002 Reserve increased to $5,000 on 12/1/2002

Calendar Year, Policy Year & Accident Year Incurred Loss Year Accident Yr Inc. Loss Policy Yr Inc. Loss Cal. Yr Inc. Loss 2001$3,000$8,000$2, $5,000$0$6,000 Year Accident Yr Inc. Loss Policy Yr Inc. Loss Cal. Yr Inc. Loss 2001$2, $0

Relationship Between Accident Year and Calendar Year Loss Ratios AY Incurred Losses = Paid Losses + Case Reserves + IBNR Reserves CY Losses = Paid Losses +  Loss Reserve Calendar Year Losses Have Two Components: Current Accident Year Losses Change In Incurred Losses for the Prior Accident Years

Impact of Prior Accident Years to Current Calendar Year Results – Stable Case Accident Year Paid in CY /31/00 Reserve 12/31/01 Reserve Reserve Change 1997+Prior$100$200$100-$ $75$200$125-$ $150$350$200-$ $200$550$350-$ $450$0$550 Total:$975$1,300$1,325$ EP = $1, AY Losses = 2001 CY Losses = $1, AY Loss Ratio = 2001 CY Loss Ratio = 80%

Impact of Prior Accident Years to Current Calendar Year Results – “Unstable” Case Accident Year Paid in CY /31/00 Reserve 12/31/01 Reserve Reserve Change 1997+Prior$100$200$100-$ *$75$200$175-$ *$150$350$280-$ $200$550$350-$ $450$0$550 Total:$975$1,300$1,455$ EP = $1, AY Losses = $1, CY Losses = $1, AY Loss Ratio = 80% 2001 CY Loss Ratio = 90.4%

What I’ve Done Since I Left UIUC Started at Zurich in June 1999 Workers’ Comp LOB Analyst until July 2001 Currently a Pricing Actuary Supporting a Business Unit

Rate Filings Proposed & Negotiated the Size of the Rate Change with Multiple Business Units Filed to Adopt Rating Bureau Loss Costs Loaded With Company Expenses & Loss Experience Modification Prepared Support for the Rate Filing Responded to Questions From Regulators

Examples of Regulator Questions Will any insureds be moved from one company to another as a result of the addition of eligibility criteria? If so, provide us with the details including the number of policies transferred by company and the range of premium impact to these risks. Please submit the data triangle and analysis supporting your loss and LAE development factors in column (8). Your general expenses increased in Please explain this. You must explain and justify the Experience Modification Factor in Line (10) of Exhibit 1.

Other Duties as LOB Analyst Calculated Corporate Rate Indications By State and Business Unit Tracked Workers’ Comp Industry Trends –Pricing of Other Carriers –General Frequency and Severity Trends –Legislation affecting Workers’ Comp

What I Have Done/Am Doing as a BU Actuary Primary Mission: Support the Field Produce Monthly Large Loss Reports Analyzed Books of Business –School –Municipalities Calculate & Explain Rate Indications Educate Underwriters on the Insurance Process Checked the Reasonability of Producer Incentive Plan Values

Things I’ve Done as a BU Actuary (Cont.) Reinsurance –Reply to Reinsurer’s Questions for Treaty Renewals –Ensure the Premium Reported to the Reinsurers is Reasonable Work With the Claims Department –Inquire About Claim Handling Practices on Lines of Business –Inform Them About Miscoded Claims Collaborated on Endorsements Pricing Provide the Reserving Actuaries with an Accurate Picture of Our Book of Business Participated on an Audit Team

Example of Endorsement Pricing Current property form excludes losses from sewer backup Management has decided that we want to provide this coverage This will be done via endorsement deleting the exclusion There is no prior loss data on this exposure What is your course of action?

Example of Endorsement Pricing (cont.) Background The exposure base for property is amount of insurance. There is a building value and contents value. Sewer backup will generally affect the basement only The value of the basement contents will vary from insured to insured. This may be true even with insureds with equal aggregate contents values

My Two Cents/Job Advice Don’t be limited by your job description Don’t let your fear of failing stop you from trying something new Acquire a working knowledge of “every function” within an organization Every role in an organization is important even if it is less technical than yours Be careful with