culture clash: us v them

Culture Clash: US v Them

Doug Lacoss

CARe - London

Casualty Pricing Approaches

16th July 2007

16 July 2007 Casualty Pricing Approaches 2

Number of Qualified Actuaries

Source: Tim Aman CARe presentation. 1. Actuaries.org 2. SOA.org 3. CAS.org

18,390

23,000

EuropeNorth America


Source: T Aman CARe 2007 Actuaries.org, SwissRe.com, CAS.org, SOA.org

Actuarial Saturation

7.20

5.72

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

North America Europe

Number of actuaries per USD 1 billion premium, non-life


Actuaries in ReinsuranceCAS Members in Reinsurance

1000

1500

2000

2500

3000

3500

4000

4500

5000

To

tal

CA

S M

em

bers

0

100

200

300

400

500

600

Mem

bers

wo

rkin

g i

n R

I

Total CAS Members Number of Members in RI


Reinsurance Actuaries – US v. Europe Number of Fellows + Associates in the US – 23,000 Percent of Non-life actuaries - 19.0% Percent of Non-life actuaries in Reinsurance – 12.1% Number of Non-life, Reinsurance actuaries in US – 529

Number of Actuaries in Europe – 18,930 Percent of Non-life actuaries – 15% Percent of Non-life actuaries in Reinsurance – 18.62% Number of Non-life, Reinsurance actuaries in Europe - 529

Source: Tim Aman presentation CARe 2007, CAS website


Reinsurance Results

Source: Benfield 2006 Reinsurance Renewal Report


Avoid the Valleys

Rate monitor Capture all business Produce regular reports Measure against exposure Adjust for

Terms & conditions Changes in coverage Varying limits / retentions Underlying rate changes


Adjusted Loss Ratios

YearLoss

Ratios

Primary Rate

ChangeRI Rate Change

Claims Trend

Impact of T&C

Change

Limits Change Impact

1995 80.0% 2% 5%1996 75.0% 5%1997 92.3% -1% -5% 5% 6%1998 107.1% -3% -6% 5%1999 113.3% 2% 5%2000 111.1% 10% 5% -12%2001 92.3% 6% 8% 5%2002 82.1% 8% 18% 5% -3%2003 75.0% 3% 6% 5% 6%2004 72.2% 7% 5%2005 76.9% -5% 3% 5% 3%2006 85.0% -8% 6% 5% 3% 3%2007 88.1% -4% 8% 5%


Adjusted Loss RatiosLoss Ratios for Line of Business

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Historical Loss Ratios Adjusted For Rates, Trend Adjusted for T&C



Loss Ratios for Line of Business

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007



Avoid the Valleys

Understand the risk Discussion with underwriters Discussion with cedents Incidental classes matter Read non-actuarial reports

Underwriting submission Claims reports Trade press


Avoid the Valleys

Locate the floor Objective measurement Unbiased analysis Portfolio view


Avoid the Valleys

Check for reasonable results Applies to both experience and exposure rating Include consideration of unknown risk


Testing XS Layer Projections Assumptions

Number of vehicles = 10 million Average premium = 1,000 Total subject premium = 10 billion Loss Ratio = 100%

Selected XS Factor, above 1 million => 10% Total Loss Cost above 1 million = 1 billion Estimate an average excess loss cost, say => 2 million Then the implied claim count = 500

Is this reasonable?


Celebrating Differences

Different data available

Different coverages

Different pricing approaches


Different Data AvailableEUROPE

In general, almost no market data available for Europe

Exception: Germany

Amount of client specific data varies by country

Even in “good” countries (UK), the data varies by company

Standard Motor market questionnaire

Rate changes - Rate change info provided by cedent, sometimes with supporting calcs

USA ISO collects data from all

member companies Loss costs, exposure curves

Amount of data varies by company Companies more open to

reinsurer visits in the US Rate changes – Due to

regulation, usually filed with state insurance departments, esp. personal lines


Different Data

Insurance Service Organisations Data from member companies in US

90% of insurance premium in some lines

Excess Loss Development

ILF tools

Very detailed info By state

Rating class

Coverage


Different Coverages Motor (Auto)

In US, basic limits quite low In Europe, unlimited liability exists

Selby – Private motor claim Public Liability (General Liability)

Limits in US $1m/$2m, then umbrella on top No umbrella in Europe, PL policies purchased to make total limit

Employers Liability In US, Workers’ Comp, 1st party coverage, unlimited EL is 3rd party coverage, though standard of negligence has been

eroded in many countries. In UK, standard limit of £10m


Different Pricing Approach

With no market data, reinsurers rely more on experience Credibility of exposure rating is lower

Experience Rating Issues Small data sets – analysis of small, regional business is volatile

from year to year; don’t overreact to random fluctuations Note “free cover”, “unused layer”

Make judgmental adjustment Fit distribution to limited losses, then extrapolate



Exposure rating issues Reinsurers attempt to build their own exposure curves European “Countrywide” data is much smaller data set than

US countrywide data Data is not homogeneous* High layers still based heavily on judgement* Reliability of curves*

*Some issues impact US curves also



General Issues Index Clauses

Standard in Europe, rare in US Cover including/excluding ALAE

Mainly a US issue Trend

Unreliable information in some countries Reinsurance Contract Structuring


Exposure rating Data set – loss triangles Can use data to estimate claims trend Get exposure data – premiums/ vehicle years Use exposures/losses to estimate frequency – poisson, neg

bin Use loss size to estimate severity – pareto, lognormal

Use distributions for non-standard layers Most loss severity data is not easily fit by curves How to get ultimate shape for casualty? Different claim costs by country make comparisons difficult

culture clash: us v them

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