Loss Rating Models: Value Proposition? Brian Ingle, FCAS, MAAA WC-4 Perspectives on Pricing Large Accounts 2006 CAS Ratemaking Seminar Salt Lake City, Utah

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 1 Large Account Pricing: State of the Industry Loss Rating Continues to Play Dominant Role in Pricing Large Accounts Some Carriers Only Use Loss Rating Models

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 2 Loss Rating Defined A pricing approach that allows you to spend a lot of quality time with your favorite underwriter…

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 3 Loss Rating Defined

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 4 Loss Rating Defined Pricing model that gives full credibility for account experience within often subjective “primary” occurrence layer Expected excess losses often extended from “primary” via industry ELFs Seldom incorporates manual loss costs Loss Cost per Unit of Exposure Selected

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 5 Loss Rating Doesn’t Come Cheap Significant Resource Investment Programming/Testing of Model Maintenance/Updating of Factors Data Verification, Input and Calculation Education and Control

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 6 Loss Rating Weaknesses Credibility Which Insureds Qualify? Selecting Primary i.e. 100% Credibility Loss Limit

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 7 Loss Rating Weaknesses

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 8 Loss Rating Weaknesses Prone to Subjectivity Selecting “Primary” Loss Limit Weighting Loss Rates Difficult to Preserve Value as Benchmark Price Monitors/Management Reports

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 9 Loss Rating Weaknesses Subjectivity Weighting Loss Rates

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 10 Appeal of Loss Rating – Quantitative Can use client’s own development experience. Can sometimes capture impact of risk changes obscured by experience rating. More years involved in calculation than 3 used by experience rating. Although parameter shift diminishes value of older years. Greater insight into insured operations can emerge. Really this should be captured through underwriting process.

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 11 Appeal of Loss Rating – Qualitative Marketing: Insureds want to see credit for their own experience…except for that one bad year. Actuaries: Opportunity for greater transactional involvement

Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 12 Optimizing Loss Rating Value Define Minimum Size Client Based on Industry Standard - E.g. minimum 50% credibility under NCCI X-Mod Rating Incorporate Industry Loss Cost Estimate Into Model – Since NCCI X- Mod Credibility Always < 1 Cap Loss Limitation at 10% State Reference Point Use NCCI X-Mod Credibility to Weight Industry and Client Specific Loss Cost Use Loss Rating Only When Credible Client Specific Development Triangles Available Capture Average Loss Indication as Well as Selected for Management Reports