2008 International Conference Golden Opportunities or Fool’s Gold? November 5-7, 2008 San Francisco How Actuaries Influence the Art and Science of Underwriting

MODERATOR: Jeffrey P. Klenk, Senior Vice President Travelers Bond & Financial Products PANELISTS: William A. Dougherty, CIC, RPLU, Insurance Broker Kenneth J. Hoppe MBA, FCAS, Vice President & Actuary, Hudson Insurance Group Stephen Meyer, FCAS, MAAA, Senior Vice President & Actuary, Max Bermuda Dale Vincent Jr., FCAS, MAAA, Executive Vice President, Specialty Casualty, Arch Reinsurance Co.

Primary Rate Making Manual Rating –Exposures to be insured –Average for the class –Unique characteristics that could influence losses Individual Account Pricing –Experience rating applied to small and medium accounts –Loss rating applied to large accounts Price Change Monitoring –Measure exposure adjusted rate changes –Measure average deviations from manual

Primary Rate Making Interaction with Underwriters Discussion of Exposure –Exposures –Exposure growth –Claims made step factors vs. occurrence Discussion of Losses and Trends –Loss development –Frequency and severity –Capping of large losses Discussion of Optimal Limits and Retentions –Limits and retention options Discussion of Risk Factors, Assumptions, and Pricing Ranges –Expenses, profit, risk load

Excess Rate Making What Reinsurance Actuaries Do With Themselves All Day Analyze Reinsurance Submissions – Burn rating – Exposure rating Establish base rates Rating plan comparisons Increased Limits and Trend Analyses Work with Primary and Captive Insurers – Try to talk physician insurers out of giving claims free credits! Audits Track Aggregate Rate Changes Reserving

Underwriter & Actuary Interaction: Actuary’s View Ensure Communication Among Actuarial and Underwriting Assess Comprehension Between Actuarial and Underwriting Evaluate Relevance of Provided Underwriting Information to Risk Question Completeness of Underwriting Information Promote Fairness of Fight Avoid Winner’s Curse Look Forward Read Policies and Contracts Be Cynical

Underwriter & Actuary Interaction: Underwriter’s View Roles and Responsibilities –Portfolio vs. account specific –Role of broker/insured for large accounts Relation Between Actuary and Underwriter –Who really prices risk? –Impact of pricing models on underwriting decisions The Art of Underwriting –Risk selection, scope of coverage

Case Study Physician Description –Primary Physician Group Practice Pricing –Territory: Los Angeles, CA Coverage –Limits: $1M/$3M per physician with no separate entity coverage –Retention: $250,000 SIR each loss, each physician. LAE pro rata to loss –Claims handling: company Exposures (# of physicians) –No surgery 97 –Minor surgery 21 –Surgery 9 –OB/gyn 13 –Miscellaneous 10 Total150 Assumptions –Historical exposures consistent with current exposure levels

Case Study Physician Loss History Report Year Reported Indemnity Reported Expense Total Loss And ALAE Non-Zero Claim CountsComments ,000521,5791,321,57920Includes a $775K claim ,700902,4791,050, ,000306,346315, ,000558,6131,358, ,499314,0381,013, ,500668,8641,068, ,000531,8471,011, ,280,000248,2991,528,29913Includes a $1,250K claim 20061,829,999564,8212,394,82030Includes a $750K and a $900K claim ,500202,938272,43822 Totals6,515,1984,819,82411,335, Evaluated at 6/30/2008

Description –Primary Hospital –Territory: Connecticut Coverage –Limits: $1M/$3M –Retention: None –Claims Handling: Company Exposures Assumptions –No exposure history –No narrative on large losses Case Study Hospital Beds:Other Exposures:Visits: Acute Care/Bassinets 46I/P Surgery6,600ER 25,000 Psych/LTAC 10O/P Surgery 821Other OPV 421, Deliveries 585 Physicians: 31

Case Study Hospital Loss History Report Year Reported Indemnity Reported Expense Total Loss and ALAE Non-Zero Claim CountsComments 19982,773,025112,8152,885,8406Includes a $2.0M claim 19994,799,796138,7364,938,5325Includes a $3.5M claim 20001,20043,58444, , ,000198,928298, , ,496130,017505, ,22780,600217, ,00014,72464, ,00016,314166,3143 Totals8,388,244825,8919,214,13536 Evaluated at 6/30/2008

Case Study Hospital Observations & Pricing Complete Data not Provided. “Reasonable” Assumptions Tend Towards Being Somewhat Conservative (Though Not “Unreasonably”, Of Course) Both Number and Incurred Dollars Less Than Expected Ratio of Ale to Loss is Also Very Low Hospital has a Lot of Births and Surgeries For its Size. Pricing Then is Dependent Upon Weight Given to Procedures Loss or “Actuarial” Rating Assumptions: –Trended severity at 6% –Capped losses at $250,000 and $500,000 –Assumed case reserves were fairly weak –Assumed exposure growth of 5% per year –Used price target of 65% loss and ALE ratio because that is what was promised the reinsurers. –Do not want to be more aggressive on an account where there is so much data missing Manual Rating: Indicated premium is $1,500,000. Indicated Premiums of $1,050,000 to $1,150,000. Selection: $1,200,000.

Description –Excess hospital pricing –Territory: Southern Illinois (not St Clair/East St Louis) Coverage –Limits: $5M/$5M umbrella. ALE is pro rata in addition –Retention: $1M/$3M primary through their captive –Claims handling: TPA Exposures Assumptions –Per actuarial study, small annual growth except 2003 with +26% jump in exposures Beds:Other Exposures:Visits: Acute Care/Bassinets 117I/P Surgery 2,840ER 58,500 Psychiatric 37O/P Surgery 8,900Other OPV 183,000 Rehab 39Deliveries 1,450 Extended Care 0 Case Study Excess

Case Study Excess Loss History Report Year Reported Indemnity Reported Expense Total Loss and ALAE Non-Zero Claim CountsComments ,782244,899695, ,676258,387651, ,090,937242,0485,332,9859Includes a $5,000K closed claim 20012,186,713275,3022,462,01510Includes 2 $800K claims 20022,657,338517,5793,174,91717Includes 2 $900K open claims 20034,307,900391,5944,699,49416Includes a $4,000K open claim ,17483,912180, ,786,193517,6853,303,87811Includes 3 $500K claims 20061,455,000306,0501,761,0507Includes a $500K open claim ,05372,297332,3503 Totals19,683,7662,909,75322,593,51995 Evaluated at 6/30/2008

Case Study Excess Observations & Pricing Both Number of Claims and Incurred Dollars More Than Twice Expected Frequency Did Not Follow Exposure Growth, so Assumed No Growth Made No Adjustment For Loss Improvement Over Last Couple of Years Development Assumption: Full Development Within 36 Months Included Risk Load for Excess Layer Premium: $1,410,000

Q & A

Many Thanks to Jeffrey P. Klenk William A. Dougherty, CIC, RPLU Kenneth J. Hoppe, MBA, FCAS Stephen Meyer, FCAS, MAAA Dale Vincent Jr., FCAS, MAAA