Culture Clash: US v Them

1. Culture Clash: US v Them Doug Lacoss CARe - London Casualty Pricing Approaches 16th July 2007

2. Number of Qualified Actuaries Source: Tim Aman CARe presentation. 1. Actuaries.org 2. SOA.org 3. CAS.org Casualty Pricing Approaches

3. Actuarial Saturation Source: T Aman CARe 2007 Actuaries.org, SwissRe.com, CAS.org, SOA.org Casualty Pricing Approaches

4. Actuaries in Reinsurance Casualty Pricing Approaches

5. 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 Casualty Pricing Approaches

6. Reinsurance Results Source: Benfield 2006 Reinsurance Renewal Report Casualty Pricing Approaches

7. 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 Casualty Pricing Approaches

8. Adjusted Loss Ratios Casualty Pricing Approaches

9. Adjusted Loss Ratios Casualty Pricing Approaches

10. Adjusted Loss Ratios Casualty Pricing Approaches

11. Adjusted Loss Ratios Casualty Pricing Approaches

12. 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 Casualty Pricing Approaches

13. Avoid the Valleys • Locate the floor • Objective measurement • Unbiased analysis • Portfolio view Casualty Pricing Approaches

14. Avoid the Valleys • Check for reasonable results • Applies to both experience and exposure rating • Include consideration of unknown risk Casualty Pricing Approaches

15. 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? Casualty Pricing Approaches

16. Celebrating Differences • Different data available • Different coverages • Different pricing approaches Casualty Pricing Approaches

17. EUROPE 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 Available Casualty Pricing Approaches

18. 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 Casualty Pricing Approaches

19. 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 Casualty Pricing Approaches

20. 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 Casualty Pricing Approaches

21. Different Pricing Approach • 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 Casualty Pricing Approaches

22. Different Pricing Approach • 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 Casualty Pricing Approaches

23. 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 Casualty Pricing Approaches