Embed Size (px)
DESCRIPTION
Pricing Large Accounts © Converium Brian Ingle, FCAS, MAAA March 13, 2006 Page 1 Large Account Pricing: State of the Industry Loss Rating Continues to Play Dominant Role in Pricing Large Accounts Some Carriers Only Use Loss Rating Models
Citation preview
Loss Rating Models: Value Proposition?
Brian Ingle, FCAS, MAAA
WC-4 Perspectives on Pricing Large Accounts2006 CAS Ratemaking SeminarSalt Lake City, Utah
Pricing Large Accounts
Page 2
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006
Large Account Pricing: State of the Industry
Loss Rating Continues to Play Dominant Role in Pricing Large Accounts
Some Carriers Only Use Loss Rating Models
Pricing Large Accounts
Page 3
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Loss Rating Defined
A pricing approach that allows you to spend a lot of quality time with your favorite underwriter…
Pricing Large Accounts
Page 4
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Loss Rating Defined
Pricing Large Accounts
Page 5
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Loss Rating Defined
Pricing model that gives full credibility for account experience within often subjective “primary” occurrence layer
Expected excess losses often extended from “primary” via industry ELFs
Seldom incorporates manual loss costs
Loss Cost per Unit of Exposure Selected
Pricing Large Accounts
Page 6
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Loss Rating Doesn’t Come Cheap
Significant Resource Investment
Programming/Testing of Model
Maintenance/Updating of Factors
Data Verification, Input and Calculation
Education and Control
Pricing Large Accounts
Page 7
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Loss Rating Weaknesses
Credibility
Which Insureds Qualify?
Selecting Primary i.e. 100% Credibility Loss Limit
Pricing Large Accounts
Page 8
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Loss Rating Weaknesses
NCCI Experience Rating Plan
-
0.20
0.40
0.60
0.80
1.00
Expected Loss(000s) Limited to 10%SRP
Cred
ibili
ty Z(p)
Z(e)
Z *
Pricing Large Accounts
Page 9
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Loss Rating Weaknesses
Prone to Subjectivity
Selecting “Primary” Loss Limit
Weighting Loss Rates
Difficult to Preserve Value as Benchmark
Price Monitors/Management Reports
Pricing Large Accounts
Page 10
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Loss Rating Weaknesses
Subjectivity Weighting Loss Rates
DEVELOPMENT OF $75,000 LOSS PICKSACME Corporation
IncurredLosses Estimated Ultimate Losses Selected TrendedTotal Excess of Loss Dev. B - F Ultimate Loss
Cov. P olicy P eriodP remium ELR Limits $75,000 Method Method Losses Cost Wghts
WC 05/22/02 92,076 0.80 11,339 0 23,588 49,591 36,589 0.59 0.805/22/01 71,183 0.80 11,636 0 13,415 19,186 16,300 0.27 105/22/00 85,065 0.80 191,547 19,779 181,626 175,462 175,462 2.41 0.5 *
05/22/99 66,277 0.80 25,947 0 26,572 27,193 26,883 0.44 105/22/98 72,345 0.80 95,958 0 97,835 97,068 97,452 1.72 0.8 *
386,946 336,427 19,779 343,035 368,500 352,685 0.91
Pricing Large Accounts
Page 11
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006
Appeal of Loss Rating – Quantitative
Can use client’s own development experience.
Can sometimes capture impact of risk changes obscured by experience rating.
More years involved in calculation than 3 used by experience rating. Although parameter shift diminishes value of older years.
Greater insight into insured operations can emerge. Really this should be captured through underwriting process.
Pricing Large Accounts
Page 12
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006
Appeal of Loss Rating – Qualitative
Marketing: Insureds want to see credit for their own experience…except for that one bad year.
Actuaries: Opportunity for greater transactional involvement
Pricing Large Accounts
Page 13
© Converium
Brian Ingle, FCAS, MAAAMarch 13, 2006Optimizing Loss Rating Value
Define Minimum Size Client Based on Industry Standard - E.g. minimum 50% credibility under NCCI X-Mod Rating
Incorporate Industry Loss Cost Estimate Into Model – Since NCCI X-Mod Credibility Always < 1
Cap Loss Limitation at 10% State Reference Point
Use NCCI X-Mod Credibility to Weight Industry and Client Specific Loss Cost
Use Loss Rating Only When Credible Client Specific Development Triangles Available
Capture Average Loss Indication as Well as Selected for Management Reports
