2008 International Conference How Actuaries Influence the Art and Science of Underwriting Golden Opportunities or Fool’s Gold? • November 5-7, 2008 • San Francisco How Actuaries Influence the Art and Science of Underwriting MODERATOR: Jeffrey P Klenk, Senior Vice President Travelers Bond & Financial Products PANELISTS: William A Dougherty, CIC, RPLU, Insurance Broker Kenneth J Hoppe MBA, FCAS, Vice President & Actuary, Hudson Insurance Group Stephen Meyer, FCAS, MAAA, Senior Vice President & Actuary, Max Bermuda Dale Vincent Jr., FCAS, MAAA, Executive Vice President, Specialty Casualty, Arch Reinsurance Co Primary Rate Making • Manual Rating – Exposures to be insured – Average for the class – Unique characteristics that could influence losses • Individual Account Pricing – Experience rating applied to small and medium accounts – Loss rating applied to large accounts • Price Change Monitoring – Measure exposure adjusted rate changes – Measure average deviations from manual Primary Rate Making Interaction with Underwriters • Discussion of Exposure – Exposures – Exposure growth – Claims made step factors vs occurrence • Discussion of Losses and Trends – Loss development – Frequency and severity – Capping of large losses • Discussion of Optimal Limits and Retentions – Limits and retention options • Discussion of Risk Factors, Assumptions, and Pricing Ranges – Expenses, profit, risk load Excess Rate Making What Reinsurance Actuaries Do With Themselves All Day • Analyze Reinsurance Submissions – Burn rating – Exposure rating • Establish base rates • Rating plan comparisons • Increased Limits and Trend Analyses • Work with Primary and Captive Insurers – Try to talk physician insurers out of giving claims free credits! • Audits • Track Aggregate Rate Changes • Reserving Underwriter & Actuary Interaction: Actuary’s View • Ensure Communication Among Actuarial and Underwriting • Assess Comprehension Between Actuarial and Underwriting • Evaluate Relevance of Provided Underwriting Information to Risk • Question Completeness of Underwriting Information • Promote Fairness of Fight • Avoid Winner’s Curse • Look Forward • Read Policies and Contracts • Be Cynical Underwriter & Actuary Interaction: Underwriter’s View • Roles and Responsibilities – Portfolio vs account specific – Role of broker/insured for large accounts • Relation Between Actuary and Underwriter – Who really prices risk? – Impact of pricing models on underwriting decisions • The Art of Underwriting – Risk selection, scope of coverage Case Study Physician • Description – Primary Physician Group Practice Pricing – Territory: Los Angeles, CA • Coverage – Limits: $1M/$3M per physician with no separate entity coverage – Retention: $250,000 SIR each loss, each physician LAE pro rata to loss – Claims handling: company • Exposures (# of physicians) – – – – – No surgery Minor surgery Surgery OB/gyn Miscellaneous Total 97 21 13 10 150 • Assumptions – Historical exposures consistent with current exposure levels Case Study Physician Loss History Report Year Non-Zero Claim Counts Reported Indemnity Reported Expense Total Loss And ALAE 1998 800,000 521,579 1,321,579 20 1999 147,700 902,479 1,050,179 28 2000 9,000 306,346 315,346 15 2001 800,000 558,613 1,358,613 29 2002 699,499 314,038 1,013,537 31 2003 399,500 668,864 1,068,364 24 2004 480,000 531,847 1,011,847 14 2005 1,280,000 248,299 1,528,299 13 Includes a $1,250K claim 2006 1,829,999 564,821 2,394,820 30 Includes a $750K and a $900K claim 2007 69,500 202,938 272,438 22 6,515,198 4,819,824 11,335,022 Totals Evaluated at 6/30/2008 226 Comments Includes a $775K claim Case Study Hospital • Description – Primary Hospital – Territory: Connecticut • Coverage – Limits: $1M/$3M – Retention: None – Claims Handling: Company • Exposures Beds: Other Exposures: Acute Care/Bassinets 46 I/P Surgery Psych/LTAC 10 O/P Surgery 821 Deliveries 585 585 Physicians: • Visits: 31 Assumptions – No exposure history – No narrative on large losses 6,600 ER Other OPV 25,000 421,000 Case Study Hospital Loss History Report Year Non-Zero Total Loss Claim and ALAE Counts Reported Indemnity Reported Expense 1998 2,773,025 112,815 2,885,840 Includes a $2.0M claim 1999 4,799,796 138,736 4,938,532 Includes a $3.5M claim 2000 1,200 43,584 44,784 2001 90,173 90,173 2002 100,000 198,928 298,928 2003 1,500 1,500 2004 375,496 130,017 505,513 2005 137,227 80,600 217,827 2006 50,000 14,724 64,724 2007 150,000 16,314 166,314 8,388,244 825,891 9,214,135 Totals Evaluated at 6/30/2008 36 Comments Case Study Hospital Observations & Pricing • Complete Data not Provided “Reasonable” Assumptions Tend Towards Being Somewhat Conservative (Though Not “Unreasonably”, Of Course) • Both Number and Incurred Dollars Less Than Expected • Ratio of Ale to Loss is Also Very Low • Hospital has a Lot of Births and Surgeries For its Size Pricing Then is Dependent Upon Weight Given to Procedures • Loss or “Actuarial” Rating Assumptions: – – – – – Trended severity at 6% Capped losses at $250,000 and $500,000 Assumed case reserves were fairly weak Assumed exposure growth of 5% per year Used price target of 65% loss and ALE ratio because that is what was promised the reinsurers – Do not want to be more aggressive on an account where there is so much data missing • Manual Rating: Indicated premium is $1,500,000 • Indicated Premiums of $1,050,000 to $1,150,000 • Selection: $1,200,000 Case Study Excess • Description – Excess hospital pricing – Territory: Southern Illinois (not St Clair/East St Louis) • Coverage – Limits: $5M/$5M umbrella ALE is pro rata in addition – Retention: $1M/$3M primary through their captive – Claims handling: TPA • Exposures Beds: Acute Care/Bassinets Visits: 117 I/P Surgery 2,840 ER Psychiatric 37 O/P Surgery 8,900 Other OPV Rehab 39 Deliveries 1,450 Extended Care • Other Exposures: Assumptions – Per actuarial study, small annual growth except 2003 with +26% jump in exposures 58,500 183,000 Case Study Excess Loss History Report Year Non-Zero Claim Counts Comments Reported Indemnity Reported Expense Total Loss and ALAE 1998 450,782 244,899 695,681 1999 392,676 258,387 651,063 2000 5,090,937 242,048 5,332,985 Includes a $5,000K closed claim 2001 2,186,713 275,302 2,462,015 10 Includes $800K claims 2002 2,657,338 517,579 3,174,917 17 Includes $900K open claims 2003 4,307,900 391,594 4,699,494 16 Includes a $4,000K open claim 2004 96,174 83,912 180,086 2005 2,786,193 517,685 3,303,878 11 Includes $500K claims 2006 1,455,000 306,050 1,761,050 Includes a $500K open claim 2007 260,053 72,297 332,350 19,683,766 2,909,753 22,593,519 95 Totals Evaluated at 6/30/2008 Case Study Excess Observations & Pricing • Both Number of Claims and Incurred Dollars More Than Twice Expected • Frequency Did Not Follow Exposure Growth, so Assumed No Growth • Made No Adjustment For Loss Improvement Over Last Couple of Years • Development Assumption: Full Development Within 36 Months • Included Risk Load for Excess Layer • Premium: $1,410,000 Q&A Many Thanks to • Jeffrey P Klenk • William A Dougherty, CIC, RPLU • Kenneth J Hoppe, MBA, FCAS • Stephen Meyer, FCAS, MAAA • Dale Vincent Jr., FCAS, MAAA ... 90, 173 2002 100,000 198,928 298,928 2003 1,500 1,500 2004 375 ,496 130,0 17 505,513 2005 1 37, 2 27 80,600 2 17, 8 27 2006 50,000 14 ,72 4 64 ,72 4 20 07 150,000 16,314 166,314 8,388,244 825,891 9,214,135 Totals... 2,6 57, 338 5 17, 579 3, 174 ,9 17 17 Includes $900K open claims 2003 4,3 07, 900 391,594 4,699,494 16 Includes a $4,000K open claim 2004 96, 174 83,912 180,086 2005 2 ,78 6,193 5 17, 685 3,303, 878 11 Includes... 450 ,78 2 244,899 695,681 1999 392, 676 258,3 87 651,063 2000 5,090,9 37 242,048 5,332,985 Includes a $5,000K closed claim 2001 2,186 ,71 3 275 ,302 2,462,015 10 Includes $800K claims 2002 2,6 57, 338 5 17, 579