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Reinsurance Pricing

Reinsurance Pricing. Sean Russell Occa Meeting July 4, 2007. Overview. Basic Reinsurance Pricing Techniques Experience Rating Exposure Rating Modeling Application of Actuarial Methods Capital Allocation. Experience Rating. Individual Companies loss experience

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Reinsurance Pricing

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  1. Reinsurance Pricing Sean Russell Occa Meeting July 4, 2007

  2. Overview • Basic Reinsurance Pricing Techniques • Experience Rating • Exposure Rating • Modeling • Application of Actuarial Methods • Capital Allocation

  3. Experience Rating • Individual Companies loss experience • Projection forward based on past experience • Trending • Layering • Developing • Premium

  4. Experience Rating

  5. Experience Rating – Trending/Developing

  6. Experience Rating – On Level

  7. Experience Rating Considerations • Lack of credible data • Weighting of individual years • Changes in Limit profiles • Changes in mix of business, classes of business • Legislative changes • New lines of business • Excess Leverage effect

  8. Exposure Rating • What to do when there is very little individual company data ? • Exposure rating Industry Burning cost • Exposure curves give distribution of loss relative to the insured limit • With exposure data (limit profile) can then develop expected losses • Loss ratio of portfolio is an important factor • Source of curves – ISO, internal data

  9. Loss Modeling • Mathematical relationships which describe losses • Typical Reinsurance models • Pareto distribution for Severity • Poisson distribution for Frequency • Log Normal distribution for Loss Ratio • Mean and Variance are important • Parameter Uncertainty • Simulation tools

  10. Modeling • Loss Sensitive Features • Sliding scale commissions • Profit commissions • No Claims Bonus • Swing Rates • Deficit Carryforwards • Payout Patterns/Discounting

  11. Capital Allocation • Why we hold Capital • Regulators • Rating Agencies • Risk • Risk  Volatility

  12. Historical Results May include primary business written in same legal entity. Includes treaty and facultative. “Combined” is sum of all legal entities owned by the same group. Swiss Re premium is gross of internal quota shares. Allocation of premium, losses, commisions to casualty (automobile,Liability) may not be accurate for multiline treaties. Combined ratio is estimated by adding average commission/brokerage for each company.

  13. Conclusions • Reinsurance pricing applies similar actuarial techniques as primary pricing • More reliance on statistical methods and distributions due to smaller quantity of data • One step further removed from insured, data quality, company knowledge critical

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