incorporating wind simulation models in property ratemaking cat-8
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Incorporating Wind Simulation Models in Property Ratemaking CAT-8. Jeffrey F. McCarty, ACAS, MAAA State Farm Fire and Casualty Company 1999 Seminar on Ratemaking March 11-12, 1999 Nashville, Tennessee. Use of Models in Property Insurance Ratemaking. Outline. General Information - PowerPoint PPT PresentationTRANSCRIPT
Incorporating Wind Simulation Incorporating Wind Simulation Models in Property RatemakingModels in Property Ratemaking
CAT-8CAT-8
Jeffrey F. McCarty, ACAS, MAAAState Farm Fire and Casualty Company
1999 Seminar on RatemakingMarch 11-12, 1999
Nashville, Tennessee
Use of Models in Property Insurance Use of Models in Property Insurance RatemakingRatemaking
General Information Why Use Hurricane Models Modeling Overview Rate Review Analysis Current Issues
OutlineOutline
1 AIY is $1,000 exposures earned in one calendar year
Proper exposure base for catastrophe ratemaking
Other available data can be used instead (e.g. in-force, written, etc.)
Amount of Insurance YearsAmount of Insurance Years(AIY)(AIY)
Use of Models in Property Insurance Use of Models in Property Insurance RatemakingRatemaking
Non-Wind Catastrophes
Non-Hurricane, Wind Catastrophes
Hurricane Catastrophes
Uncertainty Provision/Risk Margin
Calculation of the Hurricane Calculation of the Hurricane ProvisionProvision
Previous Method (1989-1996) Used Historical Companywide Losses Statewide provisions determined using relative exposure to loss Provision by territory determined using output from computer simulation model
Current Method (1997-Present) Exclusive use of computer simulation models
Concerns with Use of Historical Concerns with Use of Historical Loss DataLoss Data
Limited Hurricane ActivityLimited Hurricane Activity Frequency and Severity of hurricane activity Frequency and Severity of hurricane activity
has not been constant over time.has not been constant over time. Geographical pattern and physical Geographical pattern and physical
characteristics of the historical record do characteristics of the historical record do not not reflect the full range of possible hurricane reflect the full range of possible hurricane
events.events.
Concerns with Use of Historical Concerns with Use of Historical Loss Data (Cont.)Loss Data (Cont.)
Limited Reflection of Current ConditionsLimited Reflection of Current Conditions Changes in ExposureChanges in Exposure Changes in Policy Conditions and CoveragesChanges in Policy Conditions and Coverages Changes in Company Loss Settlement ProceduresChanges in Company Loss Settlement Procedures Changes in Company Marketing/Underwriting Changes in Company Marketing/Underwriting Increased emphasis on Building Code changes and Increased emphasis on Building Code changes and
enforcement activity.enforcement activity.
Limited Credibility by TerritoryLimited Credibility by Territory
Hurricane Computer Simulation Hurricane Computer Simulation ModelsModels
Address concerns with use of historical experience Simulate full range of possible hurricane events each with associated
probabilities of occurrence. Use of Company’s current exposure information.
Input Considerations ZIP Code versus Geo-Code of exposure location Application of hurricane deductibles Limits by sub-coverage Use of current versus projected exposure distribution
Hurricane Hazard ModelHurricane Hazard Model
Hazard Analysis
Vulnerability Assessment
Financial Assessment
Hurricane Hazard ModelHurricane Hazard Model
Hazard Analysis Hazard Analysis --
Storm ParametersStorm Parameters Central pressure Radius & maximum winds Forward speed Fill rate Storm track Landfall
Site ParametersSite Parameters Distance to the coast Terrain elevation Topology
Ultimate outcome is hurricane wind speed.
Hurricane Hazard ModelHurricane Hazard Model
VulnerabilityVulnerabilityAssessment Assessment -- Ultimate outcome is a damage
function for a particular type of building.
Structural CharacteristicsStructural CharacteristicsConstructionNumber of storiesOccupancyRoof type
Hurricane Hazard ModelHurricane Hazard Model
Measures the relative vulnerability of a structure to the different levels of intensity of a Hurricane.
For a given intensity and type of structure, damage is expressed as a probability distribution of damage ratios.
These mean damage ratios express the relative cost of repair for a given structure with respect to its replacement cost.
They are developed separately for building, contents, additional living expense and business interruption.
Damage FunctionDamage Function
Hurricane Hazard ModelHurricane Hazard Model
Financial Assessment Financial Assessment -- Resulting desired output.
Insurance Company Data InputsInsurance Company Data InputsLine of business/policy formProperty location - Geo-Code or ZIP CodeInsured values - Coverage A, B, C, DProperty replacement costDeductibleType of constructionNumber of storiesOccupancyYear of construction
Hurricane Model OutputHurricane Model Output
Annual Average Losses and higher moments
Annual Occurrence and Aggregate Loss Distributions
Probable Maximum Loss Scenarios
Effects of higher Deductibles & Coverage changes
Loss Estimates for specific events
“What If” type analysis
Largest Loss Reports
Hurricane Model OutputHurricane Model OutputAdditional ConsiderationsAdditional Considerations
Demand Surge
Loss Adjustment Expenses
Other Causes of Loss
Incorporating Hurricane Model Output into Incorporating Hurricane Model Output into RatemakingRatemaking
Loss Ratio MethodologyLoss Ratio Methodology
Calculate Hurricane average annual loss provision/AIY from model output
Add a provision for loss adjustment expense Add a provision for uncertainty (risk provision) using
higher moments of the model output Convert to a Hurricane Loss Ratio using Earned
Premium/AIY factor Add Hurricane Loss Ratio to Non-Hurricane Loss and
Expense Ratio for Total Catastrophe Loss Ratio Same method for Statewide and Territory Indications
Hurricane Provision by TerritoryHurricane Provision by TerritoryExampleExample
Incorporating Hurricane Model Output into Incorporating Hurricane Model Output into RatemakingRatemaking
Hurricane Model HurricaneHurricane Average Annual Input Modeled ProvisionTerritory Loss from Model AIY Hurr$/AIY Incl. LAE
A 1,500,000$ 400,000$ 3.7500$ 4.0125$ B 2,500,000 1,000,000 2.5000 2.6750 C 2,000,000 1,500,000 1.3333 1.4266
Statewide 6,000,000$ 2,900,000$ 2.0690$ 2.2138$
Incorporating Hurricane Model Output into Incorporating Hurricane Model Output into RatemakingRatemaking
Provision for Uncertainty/Risk ProvisionProvision for Uncertainty/Risk Provision
Reflect Relative Risk
Use Standard Deviation of modeled hurricane losses as
measure of relative risk among states/territories
Determine minimum/maximum profit
Off-balance to target companywide/statewide profit
Incorporate into Loss Ratio or Pure Premium Method
Statewide Provision for UncertaintyStatewide Provision for UncertaintyExampleExample
Incorporating Hurricane Model Output into Incorporating Hurricane Model Output into RatemakingRatemaking
Statewide CompanywideModeled Hurricane Variance 8.5550 1.5750
Standard Deviation 2.9249 1.2550 Relative Uncertainty Factor
Indicated 2.3306 1.0000 Selected 1.1000
Territory Provision for UncertaintyTerritory Provision for UncertaintyExampleExample
Incorporating Hurricane Model Output into Incorporating Hurricane Model Output into RatemakingRatemaking
Modeled SelectedHurricane Hurricane Standard Indicated Selected Provision forTerritory Variance Deviation Relativity Relativity Uncertainty
A 575.00 23.98 8.1983 3.2000 0.3200 B 77.00 8.78 3.0001 1.4500 0.1450 C 2.00 1.41 0.4835 0.2000 0.0200
Statewide 8.56 2.92 1.0000 0.1000
Hurricane Provision by TerritoryHurricane Provision by TerritoryIncluding Provision for UncertaintyIncluding Provision for Uncertainty
ExampleExample
Incorporating Hurricane Model Output into Incorporating Hurricane Model Output into RatemakingRatemaking
Hurricane Selected TotalHurricane Provision Provision for HurricaneTerritory Incl. LAE Uncertainty Provision
A 4.0125$ 0.3200 5.2965$ B 2.6750 0.1450 3.0629 C 1.4266 0.0200 1.4551
Statewide 2.2138$ 0.1000 2.4352$
Calculation of Total Catastrophe Loss RatioCalculation of Total Catastrophe Loss RatioExampleExample
Incorporating Hurricane Model Output into Incorporating Hurricane Model Output into RatemakingRatemaking
Total LatestHurricane Non-Hurricane Catastrophe Year Catastrophe
Zone Provision Provision Provision EP/AIY Loss Ratio10 5.2965$ 0.5000$ 5.7965$ 12.00 48.3%20 3.0629 0.5000 3.5629 10.00 35.6%30 3.0629 0.5000 3.5629 8.50 41.9%40 1.4551 0.5000 1.9551 7.00 27.9%50 1.4551 0.5000 1.9551 6.50 30.1%
Statewide 2.4352$ 0.5000$ 2.9352$ 8.30 35.4%
Indicated Rate Level ChangeIndicated Rate Level ChangeExampleExample
Incorporating Hurricane Model Output into Incorporating Hurricane Model Output into RatemakingRatemaking
Credibility Wtd. Total IndicatedNon-Catastrophe Catastrophe Formula Off-Balance Rate Level
Zone Loss & FE Ratio Loss Ratio Loss Ratio Relativity Change10 51.0% 48.3% 99.3% 1.3211 38.7%20 41.5% 35.6% 77.1% 1.0257 7.7%30 33.5% 41.9% 75.4% 1.0031 5.3%40 36.0% 27.9% 63.9% 0.8501 -10.7%50 44.5% 30.1% 74.6% 0.9925 4.2%
Statewide 41.3% 35.4% 76.7% 1.0000 5.0%
Modeling uncertainty
Variability between modelers’ results Florida Commission on Hurricane Loss Projection
Methodology - (5) models accepted Use of multiple models in ratemaking
Regulatory Acceptance Before/After an event Proprietary/”Black-Box” concerns
Actuarial Standards Board Exposure Draft
Separate Hurricane Rating/Class Plan
Current IssuesCurrent Issues
Separate Non-Hurricane and Hurricane Separate Non-Hurricane and Hurricane RatingRating
Florida Statutory Requirement
Interim Approach - Hurricane Factors
Separate Hurricane and Non-Hurricane Ratemaking Non-Hurricane - use Loss Ratio Method Hurricane - use Pure Premium Method Separate Class Plan with appropriate classifications Clearly identifies cost of hurricane coverage Identifies cost differences for Loss Mitigation efforts Incorporate different expense and profit provisions