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Commercial Umbrella Trends
1
2003 CAS Seminar on ReinsuranceJune 1-3, 2003Sheraton Society HillPhiladelphia, Pennsylvania
2
Umbrella Trends - 2003
Shortfall
in Claims Reserves
Increases in Loss Trends
Capacity Restrictions
New Causes of Loss
Reduction in Investment Returns
What Will Develop in 2004?
3
Where Have We Been?
– Historical profit margins have deteriorated significantly in the last few years.
– Rates have increased, but have not kept up with deteriorating loss experience
– Auto has been responsible for much of the adverse experience; GL to follow?
– National/Specialty segments drive deterioration – The industry needs to better understand the
underlying trends
4
– Significant Loss Trends– Increasing Ultimate Loss Ratios– Attachment Point Erosion
–A $1 million dollar attachment isn’t what it used to be!
–Severity and Frequency of losses in umbrella is putting pressure on umbrella profitability
–Companies pushing higher retentions
Where Have We Been?
Higher Attachments Needed to Keep Pace With Loss Trends
5
Attachment points should be adjusted with inflation
6
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Att
ach
men
t P
oin
t
We estimate that an attachment point of $1 million in 1990 is equivalent to between $4 million and $5 million in 2003
Attachment points should be adjusted with inflation
7
Financial Impact of Changes to Attachment Points
0%
50%
100%
150%
200%
250%
1 2 3 4 5
Attachment Point (in millions)
Rat
e C
han
ge
Eq
uiv
alen
t
$5M Limit
Change from $5 mill xs of $1 mill to $5 mill xs of $2 mill is equivalent to a 50% rate increase (one-third of losses eliminated)
8
LOB Loss Trend - Severity
• Sources of data– ISO Severity Data
– Jury Verdict Research Data
– Fit to Untrended Ultimate Loss Ratios
– Analysis of Ground-up Losses
• Conclusions– Use 18% annual Severity Trend from 1997 - present
– Severity Trend tempered to 8% for Regional-type business
9
Umbrella Loss Severities - ISO Data
• ISO data by layer allows us to estimate the trend for claims that are likely to penetrate reinsurance layers.
• ISO’s data indicates a jump in the excess trend data, particularly for Auto
• Also demonstrates leveraged effect of trend
10
Excess Trend Factors
• Calculate layers by subtraction:– $100,000 minus $25,000 = $75 x $25
• Fit trend lines to excess severities
• Develop trend factors by each excess layer
11
ISO Excess Severities - Comm Auto
Year Ended x25 % ch. x100 % ch. x500 % ch. x1M % ch.12/31/1995 13,002.67 7,924.37 1,966.99 325.346/30/1996 12,524.84 -3.7% 7,634.66 -3.7% 1,890.55 -3.9% 294.30 -9.5%
12/31/1996 12,465.31 -0.5% 7,615.82 -0.2% 1,873.28 -0.9% 320.78 9.0%6/30/1997 12,847.18 3.1% 7,946.63 4.3% 1,956.28 4.4% 329.14 2.6%
12/31/1997 12,984.43 1.1% 8,095.13 1.9% 2,018.92 3.2% 363.17 10.3%6/30/1998 13,277.95 2.3% 8,394.07 3.7% 2,227.44 10.3% 439.70 21.1%
12/31/1998 13,643.01 2.7% 8,667.54 3.3% 2,316.58 4.0% 414.10 -5.8%6/30/1999 14,074.83 3.2% 8,983.26 3.6% 2,439.74 5.3% 443.04 7.0%
12/31/1999 15,086.80 7.2% 9,756.55 8.6% 2,787.87 14.3% 579.23 30.7%6/30/2000 16,474.00 9.2% 10,801.18 10.7% 3,077.90 10.4% 582.50 0.6%
12/31/2000 17,730.72 7.6% 11,840.75 9.6% 3,491.07 13.4% 689.12 18.3%6/30/2001 18,571.45 4.7% 12,513.17 5.7% 3,794.41 8.7% 765.52 11.1%
Average Annual 24 PT: 7.7% 9.8% 14.4% 18.6% Change 12 PT: 13.7% 16.5% 21.7% 23.2%
Intermediate Points not Displayed
12
ISO Excess Severities - Products
Accident B/L (100K) T/L X/L AnnualYear Actual Actual Actual % Change1990 10,767 14,549 3,781 1991 10,954 14,866 3,911 3.43%1992 11,011 15,594 4,583 17.18%1993 13,423 18,113 4,691 2.35%1994 12,064 16,407 4,342 -7.43%1995 13,593 17,886 4,293 -1.14%1996 14,963 21,608 6,645 54.78%1997 15,623 21,602 5,979 -10.01%1998 14,895 20,758 5,863 -1.94%1999 14,761 22,154 7,393 26.10%2000 18,138 26,044 7,906 6.93%
10 Year Fit 5.0% 5.7% 7.7%
10 Year Excl. '00 4.5% 5.2% 7.0%
5 Year Fit 3.3% 4.1% 5.8%
5 Year Excl. '00 1.6% 4.0% 10.1%
3 Year Fit 10.4% 12.0% 16.1%
3 Year Excl. '00 -2.8% 1.3% 11.2%
13
ISO Excess Severities - Prem/Ops
Accident B/L(100K) T/L X/L AnnualYear Actual Actual Actual % Change
12/31/1991 15,692 22,461 6,769 12/31/1992 15,403 22,311 6,908 2.04%12/31/1993 15,908 22,424 6,516 -5.67%12/31/1994 17,012 24,004 6,991 7.29%12/31/1995 16,994 24,323 7,329 4.83%12/31/1996 18,127 27,023 8,895 21.37%12/31/1997 18,594 29,381 10,788 21.27%12/31/1998 19,702 31,412 11,710 8.55%12/31/1999 19,230 29,358 10,128 -13.52%12/31/2000 20,537 30,180 9,643 -4.78%
All Year Fit 3.2% 4.3% 6.5%
All Year Excl. '00 3.2% 4.7% 7.8%
5 Year Fit 3.1% 3.1% 3.0%
5 Year Excl. '00 3.4% 5.8% 10.9%
3 Year Fit 2.3% -1.5% -8.3%
3 Year Excl. '00 1.3% 1.2% 1.0%
Intermediate Points Not Displayed
14
ISO Excess Severities - Summary
60.0% 40.0%Auto Auto Auto Auto XS Auto GL GL Adj.
XS 25K XS 100K XS 500K XS 1M Sel 1M XS 100K to 1M Wtd XS
10 Yr Fits 3.36% 4.28% 6.29% 8.13% 8.13% 6.92% 13.16% 10.14%10 Yr xcl '00 (GL) 3.36% 4.28% 6.29% 8.13% 8.13% 7.53% 14.31% 10.60%
5 Yr Fits 7.68% 9.79% 14.39% 18.60% 18.60% 3.97% 7.55% 14.18%5 Yr xcl '00 (GL) 7.68% 9.79% 14.39% 18.60% 18.60% 10.60% 20.14% 19.21%
3 Yr Fits 5.80% 16.52% 21.69% 23.21% 23.21% 0.33% 0.47% 14.11%
3 Yr xcl '00 (GL) 5.80% 16.52% 21.69% 23.21% 23.21% 4.62% 6.50% 16.52%
Notes: 1) GL Trends were fit to combined Prem Ops and Products data. The corresponding weighted averages obtained using trends by subline are 18.64% and 18.00% for the 5 yr and 3 yr fits, respectively.2) Auto/GL split of 60%/40% based on general observations of umbrella loss activity.
GL Subline weights are 65% Prem-Ops, 35% Products, based on ISO loss data.3) Paid trends used in this exhibit for Auto, seems more representative of observed trends.
4) 5 Yr Fits for Auto are actually 6 year fits.5) Averages without 2000 year are displayed for GL only, where fluctuations were noted in the
individual subline data for that year.6) GL xs 100K adjusted based on correponding relationship between auto layers.
15
Fitted Auto Liability Excess Layer Severity Trend (Base: March 1997)
1.0
1.2
1.4
1.6
1.8
2.0
2.2
Mar
-97
Jun-
97
Sep-9
7
Dec-9
7
Mar
-98
Jun-
98
Sep-9
8
Dec-9
8
Mar
-99
Jun-
99
Sep-9
9
Dec-9
9
Mar
-00
Jun-
00
Sep-0
0
Dec-0
0
Mar
-01
Jun-
01
Year Ended
Re
lati
ve
La
ye
r L
os
s S
ev
eri
tie
s
Losses xs $25K; annualized trend=9.8%
Losses xs $100K; anuualized trend=12.2%
Losses xs $500K; annualized trend=18.1%
Based on Tillinghast analysis of information published by ISO
Loss trends exhibit a leveraged effect as limit increases
16
Fitted vs Actual Loss Severities for Auto Liability Losses xs $500k
(Annual Loss Trend =18.1%)
1,500
2,000
2,500
3,000
3,500
4,000
Mar
-97
May
-97
Jul-9
7
Sep-9
7
Nov-9
7
Jan-
98
Mar
-98
May
-98
Jul-9
8
Sep-9
8
Nov-9
8
Jan-
99
Mar
-99
May
-99
Jul-9
9
Sep-9
9
Nov-9
9
Jan-
00
Mar
-00
May
-00
Jul-0
0
Sep-0
0
Nov-0
0
Jan-
01
Mar
-01
May
-01
Year Ended
Lo
ss S
ever
itie
s
Actual
Fitted
The long-term fit is good; slightly higher than average trends in more recent points
Based on Tillinghast analysis of information published by ISO
17
Jury Verdict Research Data - Summary
Overall Award Trends Auto Liability Trends
Median Mean1994 $45,000 $419,2831995 $48,000 $646,8211996 $39,354 $554,3401997 $43,449 $618,1311998 $47,339 $661,9201999 $39,832 $854,9942000 $50,000 $1,167,949
All Yr Fit 0.5% 14.6%
3 Yr Fit 2.8% 32.8%
Wtd 60% Auto / 40% GL
All Yr Fit 10.30%3 Yr Fit 20.74%
18
Jury Verdict Research Data by Subline
Median Mean Median Mean Median Mean1994 $21,499 $187,152 1994 $61,233 $333,333 1994 $434,247$1,744,2371995 $20,000 $191,069 1995 $77,950 $461,197 1995 $497,000$2,552,1101996 $18,360 $284,146 1996 $75,000 $259,421 1996 $700,000$2,660,2231997 $16,449 $232,406 1997 $94,500 $350,947 1997 $537,500$3,477,2851998 $20,000 $187,637 1998 $100,034$625,273 1998$1,197,885$2,918,0371999 $16,293 $281,142 1999 $100,000$655,018 1999$1,600,000$6,270,2402000 $20,000 $268,648 2000 $114,862$698,206 2000$1,800,000$6,817,086
All Yr Fit -1.9% 5.3% All Yr Fit 10.0% 14.5% All Yr Fit 29.1% 23.8%
3 Yr Fit 0.0% 19.7% 3 Yr Fit 7.2% 5.7% 3 Yr Fit 22.6% 52.8%
19
Mean Overall Jury Verdicts(fitted annual trend: 14.6%)
400,000
550,000
700,000
850,000
1,000,000
1,150,000
1994 1995 1996 1997 1998 1999 2000
Year
Mea
n J
ury
Ver
dic
t
Actual
Fitted
Source: Tillinghast analysis of information published by Jury Verdict Research
Non-insurance data shows steep upward liability cost trends
20
Trend Fit to Historical Ultimate Experience
Notes: 1) MM Loss Ratios developed to ultimate and adjusted to current rate level 2) Total Comm developed to Ultimate only, includes all National/Specialty Umbrella results
Middle Market Total Comm UmbAnnual Annual
Year On-Level BF On-Level LDF Change Est. Ultimates Change1990 14.44% 12.73%1991 24.21% 23.38% 83.7%1992 18.10% 16.66% -28.7%1993 26.05% 24.35% 46.2%1994 29.75% 27.60% 13.3% 68.00%1995 30.17% 26.68% -3.3% 60.30% -11.3%1996 27.70% 20.69% -22.5% 56.50% -6.3%1997 41.17% 34.40% 66.3% 115.80% 105.0%1998 58.37% 63.44% 84.4% 105.10% -9.2%1999 49.89% 45.03% -29.0% 132.90% 26.5%2000 62.90% 51.33% 14.0% 124.30% -6.5%2001 62.73%
All Yr Fit 13.7% 13.6%
'95 - forward 15.5% 19.4%
'97 - forward 9.6% 9.0%
21
Ground-up Trend Analysis
• Two Methods of Trending Umbrella Losses– Using Umbrella/Excess Trend– Applying Primary Trend to Ground-up Losses
and allocating to layers
• Second method will capture Leveraged effect of trend
• Primary Trend = Wtd GL/Auto Trend + 2%
22
Ground-up Trend Analysis
Reported Losses
Trended Losses Ratio
Fitted Trend
4,237,037 58,421,301 13.788 4.81810,589,769 16,959,818 1.602 4.22624,996,494 80,777,942 3.232 3.70713,452,226 60,941,490 4.530 3.252
9,258,694 43,355,269 4.683 2.85311,507,460 34,302,405 2.981 2.50226,173,063 51,529,324 1.969 2.19532,467,892 55,385,993 1.706 1.925
8,783,914 21,052,775 2.397 1.6893,912,441 7,658,371 1.957 1.4821,011,734 1,011,957 1.000 1.300
- 149,176 0.000 1.14014.0%
Fitted Trend = 14.0% based on development of ground up losses with 7.25% trend
23
Ground-up Trend Analysis
• Additional data to request for umbrella pricing– Individual umbrella losses with umbrella plus
the underlying claim with underlying limits• Line of business, date of loss, alae, etc. for each
claim
– Individual large losses up to 1/2 the umbrella attachment point where there is an umbrella in place
24
Commercial Lines Rate Index Adjusted for Loss Trend
20%
30%
40%
50%
60%
70%
80%
90%
100%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Price Index
Net Price Index
Based on estimated commercial lines rate changes and loss trends: Composite from CIAB, CAS & Morgan Stanley Reports
25
- Retention Increases - Existing Capacity Reduction- New Capacity- Portfolio Analysis - New/Evolving Exposures- Reinsurers Looking for Transparency
Present Market Observations
Companies are Concentrating on Portfolio Analysis to Improve Profit Potential
26
• Aggregate Monitoring: - Understanding Total Limits Purchased- WTC Type Aggregations of Limits- Classes of Business Being Insured - Umbrella as a Profit Center- Developing Aggregate Monitoring Process
- Fortune 1000 - Limits in Excess of $100 Million
Future Underwriting Issues
Trend Towards Identifying Umbrella as its Own Profit Center
27
–Loss Trends Continue to Escalate –New Exposures/No Historical Experience –Investment Income Diminished - Need
Underwriting Profit–Aggregate Issues Putting Pressure on
Capacity–Statistical Records Needed to Evaluate
Umbrella
Takeaways
28
Consulting Actuary, Tillinghast–Towers Perrin
Mr. Ghezzi is a consulting actuary with Tillinghast in its Boston office. He is a principal of Tillinghast. He is a fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries.
Mr. Ghezzi has worked with insurers and reinsurers on most property/casualty lines of business. He has worked extensively with medical professional liability insurers and self-insurers, and is a faculty member of Tillinghast’s Medical Malpractice Seminar.
Prior to joining Tillinghast, Mr. Ghezzi was vice president and actuary with Commercial Union Insurance Companies. Mr. Ghezzi began his actuarial career at Insurance Services Office.
Mr. Ghezzi is a past president of the Casualty Actuaries of New England, and a current member of the American Academy of Actuaries’ Committee on Property Liability Financial Reporting (COPLFR). Mr. Ghezzi co-authored a paper published by the Casualty Actuarial Society on the impact of federal income taxes on property/casualty insurers.
Mr. Ghezzi holds a B.S. in mathematics from the Pennsylvania State University.
Thomas L. Ghezzi
29
2nd Vice President - Pricing Actuary GE ERC
Gerson Smith is currently the lead pricing actuary of GE ERC's national accounts division, working in GE ERC’s New York office.
He has 14 years of experience in the property and casualty insurance industry, nine of those in reinsurance. Mr. Smith was previously with St. Paul Re, where he was the lead pricing actuary for their worldwide Financial Lines unit.
He is a fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries. He has presented at numerous seminars, including Casualty Actuaries in Reinsurance and the CAS Reserving Seminar, and has extensive experience presenting actuarial methodologies to clients both in the U.S. and abroad.
Gerson Smith
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