New Products – The Intersection of Pricing, Reserving, Planning Betsy DePaolo Vice President & Actuary, Personal Insurance Travelers Insurance Casualty Loss Reserve Seminar September 11, 2007

Pricing a New Product  Many different ways to price a new product  High Level Overview:  New Variables -Determine factors (multivariate analysis) -Determine base rates -Consideration of competition, disruption in marketplace, regulatory  New Underwriting Guidelines -Determine impacts of changes in mix  Will product be New Business Only or Conversion? -Conversion – determine disruption on current book  Calculate / Approximate the adequacy of filed rates  Compare to current book of business  Determine Expected Loss Ratio as starting point

New Product Rolls Out – Now What?  Business team needs metrics to determine how product is doing  Adequacy of pricing  Reserving ultimates for financial reporting  Planning / Forecasting -Expected experience in future years

New Product Rolls Out – Now What?  Use Expected Loss Ratio from pricing analysis as initial “best guess”  As losses begin to be reported, watch out for:  Distortions in Loss Development -Average Accident Date is not at midpoint of time period -Distorts in times of extreme growth or decline  “Large” Losses  Seasonality  Comparisons to current book of business  Changes in Mix -State distribution -Type of insured

Loss Development Distortions  Shift in Average Accident Date as product rolls out

Loss Development Distortions

“Large” Losses  How do you provide suitable results to business team without threat of overreaction?  Impact of Large Losses  Large is typically considered $100K or even more  Normally don’t expect large losses to impact short tailed lines (Comprehensive, Collision, Property Damage)  Early in rollout, calculate the Loss Ratio impact of $25,000 loss (average cost of totaled car) -Provide to business team to give sense of materiality

Seasonality  Significant impact on loss ratio experience  Weather  Travel  Geographical differences abound  Impact of catastrophes on comprehensive coverage  First year and beyond – uneven weight of premium by state can cause distortions in the loss ratios  When comparing Actual Loss Ratios to Expected Loss ratios  Adjust ELR’s for seasonality  Normalize actual loss ratios

Seasonality

Rolled out in 2005 Rolled out in Apr 2006 Rolled out in Jan 2006

Seasonality

Comparison to Existing Products  Comparison to existing ultimate loss ratios and ELR’s  Adjusted for seasonality  Adjusted for New Product distribution by month  Adjustment for “environmental” conditions

Other Analytical Tools  Triangles Files  Drill down to monthly activity -Trend or Blip?  Analyze how quickly loss ratios settle down  Analyze differences in development between New Product / Existing Product  Frequency, Severity and Pure Premium Analysis  Triangles of Reported and Ultimate Data  Comparisons to Existing Product  Book of Business  Analyze impacts as book of business ages

Triangle Files – New Product Please note: All numbers are fabricated but illustrate the types of results that can be seen

Triangle Files – Existing Product Please note: All numbers are fabricated but illustrate the types of results that can be seen Poor experience similar to new product Better experience than new product

Book of Business  Additional analysis on where loss ratio is expected to go in future years  As book of business ages, we expect loss ratios to improve  Assumptions:  New Business Penalty / Renewal impacts on Loss Ratio  Growth in New Business  Retention  Filed Rate Changes

Other Considerations  Separately analyze  Catastrophe claims  Excess / Large Losses  Analysis completed both with LDF method and Bornhuetter-Ferguson method to reduce volatility

Incorporation into Planning  Projections of future new business growth  Projections of future retention / renewal  Incorporate into loss ratios, making additional adjustments for  Seasonality  Expected Excess Losses  Expected Catastrophe Losses  Additional mix shifts  Anticipated rate / factor adjustments

Advantages of Monthly Methodology  Responsive – allows business team to analyze data and make decisions quickly  Monthly loss development limits distortion due to growth  Monthly loss development allows drill down  Comparison to existing products allows recognition of environmental factors

Disadvantages of Monthly Methodology  Responsive – loss ratios can bounce around from month to month  Responsive – susceptible to distortion by large losses  Credibility – takes several months to have enough data to analyze  Monthly loss development still may have some distortion due to growth  Potential differences in loss development between products  Potential impact of mix changes in book of business

Other Applications  Applies to more than just New Product rollout  New Distribution Channel  New States  Accelerated Growth

Questions????