2004 cas ratemaking seminar
DESCRIPTION
2004 CAS RATEMAKING SEMINAR. INCORPORATING CATASTROPHE MODELS IN PROPERTY RATEMAKING (PL - 4) PRICING EARTHQUAKE INSURANCE DAVE BORDER, FCAS, MAAA. PRICING EARTHQUAKE INSURANCE. Overview Earthquake Ratemaking Earthquake Modeling Uses of Earthquake Models Whose Fault is it?. - PowerPoint PPT PresentationTRANSCRIPT
2004 CAS RATEMAKING SEMINAR
INCORPORATING CATASTROPHE MODELS IN PROPERTY RATEMAKING (PL - 4)
PRICING EARTHQUAKE INSURANCE
DAVE BORDER, FCAS, MAAA
PRICING EARTHQUAKE INSURANCE
Overview
Earthquake Ratemaking Earthquake Modeling Uses of Earthquake Models Whose Fault is it?
EARTHQUAKE RATEMAKING
Earthquake insurance is typically a separate optional coverage
Wide usage of deductibles Fire Following exposure Great variation of pricing
» Territorial» Construction
EARTHQUAKE MODELINGComparison with Hurricane
Separate coverage vs. package coverage
Historical data – Future reliability Frequency estimates – Landfall vs.
Fault Rupture Damage estimation – Advances in both
areas
EARTHQUAKE MODELINGAdvantages
Many years of seismological data» Many good sources of geological and seismological
data» Paleoseismology – Science of identifying and dating
past earthquakes by geological studies Damageability information by construction type Current distribution of insured exposure to risk
EARTHQUAKE MODELINGAlphabet Soup
Many sources of historical information» USGS – United States Geological Service» CDMG – California Division of Mines and Geology» SSA – Seismological Society of America» EERI – Earthquake Engineering Research Institute» AGU – American Geophysical Union» SCEC – Southern California Earthquake Center
MODELING BASICS
Simulate location and magnitude of earthquake» Gutenberg-Richter Magnitude» Modified Mercalli Intensity (MMI)
Estimate components of earthquake Estimate event intensity Damage estimation
EARTHQUAKE MODEL
For each simulated earthquake:» Establishes probability of occurrence» Establishes focal depth and rupture length» Determines shaking intensity and liquefaction» Determines damageability ratios
Calculates expected damageability ratios at a location for all simulated events» Distance from rupture» Soil conditions
REVIEW OF MODEL
Consistent with guidelines in ASOP 38 (Using Models Outside the Actuary’s Area of Expertise)
Level of geographic detail available to run the model
Is current book of business representative of future book?
MODEL OUTPUT
Very similar to hurricane output Average Annual Losses and Mean
Damageability Ratios (MDR’s) by:» Zip code or portion of zip code in a territory» Building / contents / ALE coverage» Construction type» Occupancy type
ADDITIONAL CONSIDERATIONS
Aftershocks Debris Removal Demand Surge Loss Adjustment Expense
» More internal damage» Additional adjusters needed
USES OF EARTHQUAKE MODEL
Determination of earthquake rates» Territorial determination» Deductible pricing
Manage catastrophe exposure» Underwriting criteria» Deductible usage» Reinsurance usage
Damage estimation following an event
TERRITORIAL CONSIDERATIONS
Known fault lines Blind-thrust faults Cascading faults Seismic zones with estimated frequency
TERRITORIAL RATEMAKING
Model – AAL’s and MDR’s based on percentage deductible» Select Deductible requirement» Price alternative deductibles as appropriate
Group zip codes into territories» Cluster based on MDR’s» Reasonability check based on known fault configuration
Different loss costs by construction type
EARTHQUAKE RATEMAKING
Convert loss costs into rate» Incorporate provision for expenses
– Agent commission– Other variable and fixed expenses
» Profit provision– Great variability of results
Determine overall indicated change
SPECIAL CONSIDERATIONS
State facility established (CEA)
Losses impacting primary policy caused by earthquake» Fire Following» Sprinkler Damage
FIRE FOLLOWING EARTHQUAKE
Fire Following losses are typically covered under primary policy» Must provide modeler with full set of exposure data» Broader exposure set than Earthquake policies
Damage ratio should be incorporated into package rate» Replace actual fire following losses » Low significance in most areas
WHOSE FAULT IS IT?
Arguments exist regarding variation of rupture intensity» Smoothing provides good estimate, or» Each fault has a single rupture point
Return time consideration in annual pricing» Price to the average, or» Consider time since last occurrence
RETURN TIME ARGUMENTS
Increasing time since last event decreases time until next occurrence
Increasing time since last event increases time until next occurrence
Appropriate to use average annual loss
ADDITIONAL REFERENCES
Pricing the Earthquake Insurance Using Modeling» Debra Werland and Joseph Pitts» 1997 Winter Forum
U.S. Earthquake Frequency Estimation – Ratemaking for Unusual Events» Stuart Mathewson» 1999 Winter Forum