Premium Allocation Facts and Theories: Methodology NY RIMS Breakfast Meeting June 21, 2012 Pam Ferrandino, EVP, Willis National Casualty Practice Leader Alex Levine, Willis National Casualty Practice

Creativity in Insurance?? Now what…. We have a solid understanding of: Expenses Cash Balance Sheet How do these impact your Key Performance Indicators (KPIs) How can Risk Management improve KPI’s

Designing the Allocation What has to be paid? How much must be collected? Who will pay it? When will it be collected? What are the financial objectives? Does your allocation affect risk behavior?

Recapping - What has to be paid? Loss & Loss Expense –What type of losses do I have –What is driving my losses –Which are controllable –Can they be improved –Does geography impact cost –Expenses in addition to loss Risk Transfer Cost Risk Financing Cost Internal Administrative Costs and Other Expenses Cost Risk Transfer & Financing Loss Costs Expenses

Who should pay for it? Subsidiaries Divisions Locations Subpart of any of the above: Building Production Run Product Line The Division, Unit or Location driving the losses? Subsidiary Division Location Other

How much to collect? Retained Loss –Expected or Higher Confidence Level –Policy or Accident Year Projected Ultimate –Calendar Year Paid/Incurred/Ultimate Expenses –Fixed: Exposure and transaction related –Variable: Loss related Risk Transfer –Deposit –Audited –Projected if sensitive to a swing based on losses Other –TBD

When will costs be recognized? At or before inception? Monthly, quarterly, annually? As required by insurer adjustments? As required by actual cost vs. allocated cost? When the incident occurs? Loss Cost IBNRReservesPayments What is the timing of these ?

Risk Management Opportunities Measure what you treasure Increase focus on and implementation of Loss Control Avoidance : Frequency Mitigation: Severity Adherence to optimal Claims Management Mitigation: Severity Reduce indirect risk costs Profit Center Manager Buy-in (Fairness) Improving KPI’s

If Everything Was This Simple

Allocation Components Exposure base Loss experience Experience Period Paid/Incurred/Projected Ultimate Severity Cutoff and impact Claim Frequency impact Confidence Level for Projection to be allocated Weighting for exposure and experience Credits and Debits for compliance with loss control and claims management best practices. Caps and Balancing Future adjustments and assessment features 10

Sample Corporation 1/1/2007 Property Allocation Premium Based on % of Total Value 11

Sample Corporation 1/1/2007 Property Allocation Premium Based on Property Type 12

Property Allocation Comparison 13

Automobile Liability Exposure Options Type of vehicle Annual mileage State in which garaged Radius of operations Rural or urban environment 14

Sample Corporation 1/1/2007 Automobile Liability Allocation Premium Based on Exposure 15

Experience Measures Number of historical years Age of historical years Incurred, paid, or developed losses Number of claims Limited or unlimited losses 16

Sample Corporation 1/1/2007 Automobile Liability Allocation Premium Based on Experience 17

Sample Corporation1/1/2007 Automobile Liability Allocation 18