March 9-10, 2000 The Contest - Part I CAS Seminar on Ratemaking SPE - 47 Thomas L. Ghezzi, FCAS, MAAA Katharine Barnes, FCAS, MAAA

2 Judging Based on Application of Actuarial Ratemaking Principles and Standards of Practice and Quality of Documentation in Actuarial Report Gave Lots of Weight to the CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking Data Credibility and Homogeneity Loss Development, Trend, Etc. ACTUARIAL JUDGEMENT We Set out to Get the Best Possible Answer  Quirks of Texas Law to be Debated at the Hearing  We Used All Relevant Data and Noted Uncertainties Where Appropriate

3 Actuarial Report Designed to Document Data, Judgments and Assumptions Relied on SOP 9 - Documentation and Disclosure in Property and Casualty Insurance Ratemaking, Loss Reserving and Valuations Documentation Sufficient for Another Actuary Practicing in the Same Field to Evaluate the Work We Added an Additional Goal that the Analysis be as Understandable as Possible to Non-Actuaries Value-Added

4 This Ratemaking Problem Not Unlike Most Ratemaking Applications Encountered in Real Life - Only the Details are Different Statutory Rate Standards Similar to Most States Rates to be “just, reasonable, adequate, not excessive, not confiscatory and not unfairly discriminatory” Complications Data Issues Plan Population Changes Tort Reform Lots of Judgment Required

5 Biggest Areas of Judgment and Uncertainty in Almost All Analyses - And the Source of Most Arguments at Rate Hearings - Are Present Here Loss Development Trend Frequency Severity Pure Premium Expenses Other Issues Are Important Too, But We Will Concentrate on These Three Areas

6 There Are Essentially Three Sources of Loss Development Data - Each With Advantages and Disadvantages Stat Plan Data - Involuntary Market AdvantagesDisadvantages Invol MarketLow Volume (Credibility) Basic LimitsDataChange in FR Limits Stat Plan Data - Total Market AdvantagesDisadvantages Good CredibilityDominance of Voluntary Data Total Limits ISO/NAII Texas Data AdvantagesDisadvantages Good CredibilityDominance of Voluntary Data Current FR LimitsSample of Carriers No Maturities > 63 (or 39) Mos

7 Given the Advantages and Disadvantages, We Believe that All Three Sources of Data Should be Considered - Example for Bodily Injury

8 There are Two Basic Sources of Texas-Specific Trend Data Trend Data Survey Calendar Quarter Data Total Limits Paid Losses and Paid Claims Involuntary Separate from Voluntary ISO Fast Track Data Calendar Quarters Total Limits Paid Losses, Paid Claim Counts and Arising Claim Counts (BI and PIP Only) Total Market

9 There Are Several Complications That Make the Trend Analysis More Uncertain Than Usual Use of Calendar Quarter Data Causes Mis-match Between Exposures and Paid Losses and Claims  Mis-match Exacerbated by Changes in Involuntary Exposure Level Tort Reform in 1995 Trend Data Spans Pre- and Post-Tort Reform Periods

10 In Order to Make Use of the Maximum Amount of the Available Data, We Made Several Adjustments Lagged Exposures Exposures Adjusted Based on Estimated Paid Loss Development Patterns  Theoretically Corrects for Mis-match Tort Reform Adjustment Pre-Tort Reform Accident Periods Adjusted by 7.5% Tort Reform Effect Approved by the Commissioner  Use Loss Development Patterns to Estimate the Portion of Calendar Period Data Related to Pre- Tort Reform Accident Periods

11 The Changing Volume of Plan Business Makes the First Adjustment Significant for the Survey Trend Data - Example for Bodily Injury Exposures

12 The Tort Reform Adjustment, While Important, is Less Significant - Example for Bodily Injury Losses

13 Combined, These Adjustments Have a Significant Impact on the Survey Trend Data Pure Premiums. Apparent Upward Trend Turns Downward (Similar to Total Market Trends) - Example for Bodily Injury

14 Additional Trend Complications Are Handled Judgmentally Changing Plan Population Underlying Cost Changes Could Be Related to Factors Other Than Trend  We Gave Some Weight to Total Market (i.e., Fast Track) Trends Total Limits Data Would Expect Basic Limits Trends to be Lower Data Does Not Always Behave This Way Use of Pure Premium Trends Avoids the Need to Make Separate Claim and Loss Adjustments

15 Expense Loadings Are Mostly Straightforward, With a Few Relatively Minor Complications Four Main Categories Commission and Brokerage Other Acquisition General Expenses Taxes, Licenses and Fees Texas and Countrywide Data Available Some Unusual Considerations and Adjustments Needed

16 Some Expenses Are Explicitly Disallowed for This Analysis Advertising, Lobbying, Contributions, Bad Faith Awards, Penalties or Fines, and Fees to Advisory Organizations Relatively Minor

17 Variation in Indications by Type of Carrier Poses Unusual Complication in Estimating Acquisition Expenses Commission and Brokerage Set Contractually at 10% Other Acquisition Other Acquisition Expense Ratio Indication Higher for Non-Stock Companies Than For Stock Companies  May be Definitional and/or Accounting Differences  Use Total Market Combined Commission, Brokerage and Other Acquisition Data, Minus 10% Commission and Brokerage Loading

18 Data Exists That Implies Greater Effort Required to Service Involuntary Market Business than Voluntary Market Business Adjust Other Acquisition and General Expenses Start With Countrywide Ratio Indications Adjust to Reflect Data that Residual Market Expenses are 49% Higher than Voluntary Market Ratios Imply

19 We Believe that Trend and Rate Level Adjustments are Needed for Other Acquisition and General Expenses Base Expense Trends on CPI and Average Weekly Wages of Employees of Fire and Casualty Insurers Judgmentally Assume 50/50 Weighting of These Two Indices Further Adjust Historical Ratios to Current Rate Level