ClaimsMade Ratemaking Casualty Actuarial Society Seminar on Ratemaking

Claims-Made Ratemaking Casualty Actuarial Society - Seminar on Ratemaking INT-6: Basic Techniques for Other Lines James D. Hurley March 9, 2000

Claims-Made Ratemaking n Advantages of Claims-Made Relative to Occurrence q Insured - Price is less if underlying trend is positive Ability to keep policy limits current Availability greater q Insurer - No IBNR - reserving and pricing easier, more accurate - With an unexpected change in trend, claims-made more correct - Shorter time horizon on future forecasts - Willing to offer claims-made where occurrence not viewed as option 2 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking n Disadvantages of Claims-Made Relative to Occurrence q Insured - Understanding of coverage is not as great Report date may be manipulated Tail coverage - cost and understanding Large price increases going from first year to mature q Insurer - Less investment income - Unfavorable Federal income tax treatment with use of industry payment pattern - Change in limits or specialty difficult to rate correctly - Historical data may be inappropriate when switching from occurrence to claims-made 3 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Rate making Differences - Claims-made vs. Occurrence n Claims-made maturity has no occurrence counterpart n Different dimension of loss development q Claims-made has no “true” IBNR q Development by lag (RY - AY) n Exposures have 1 -D in occurrence and 2 -D for claims-made n Tail coverage links claims-made and occurrence 4 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Retro Date & Claims-Made Coverage MD who has coverage in 1988, began 1 st year claims-made in 1985 Retroactive Date: 1/1/85 Definition: Occurrences on or after the retro date are covered by the claims-made policy. 5 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Retro Date & Claims-Made Coverage MD who has coverage in 1988, began mature claims-made in 1985 Retroactive Date: Prior to 1983 6 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Tail Coverage MD who began 1 st year C-M in 1985, left at end of 1988 without tail 7 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Tail Coverage MD who began 1 st year C-M in 1985, purchased tail at end of 1988 8 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data & Lags 9 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data & Lags Note: Lag = Report Year - Accident Year 10 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data & Lags 11 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data Sum of Latest Diagonal = 655 12 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data Sum of Latest Diagonal = 655 13 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data 14 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data Exposures n Exposure based approach necessary n Why? q Handle various maturities/classes q Identify difference between development/emergence q L/R methods distorted by changes in reporting patterns n Require 2 -D grid q No occurrence equivalent q Handle C-M entry (1 st, 2 nd, etc. ) q Handle exit (tail vs. no tail) q Handle change in classes 15 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data Exposure 16 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data Exposure - Class 1 Basis 17 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data Losses n Require AY by RY n Why? q Loss corollary to 2 -D exposure q Support development/emergence pattern distinction q AY only; lose RY consideration q RY only; lose exposure distinction and development can vary by lag n Procedure q A data triangle represents current evaluation q Calculate LDF’s by lag and age since report q Apply by cell to derive ultimate 18 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Data & Method - The 3 rd Dimension Valued at 12/31/88 19 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Method - Simplified Development by Lag 20 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Method - Development by Lag * Assumed same as Lag 2. 21 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Method - Developed Reported Developed to Ultimate 22 G: DEGRENJJIMPRESENTCASRatemaking. ppt

Claims-Made Ratemaking Method Next Steps n Calculate pure premium (or frequency/severity) in AY by RY detail n Analysis of trends; reporting patterns n Expenses - consider flat loading n Recognize ILF differences 23 G: DEGRENJJIMPRESENTCASRatemaking. ppt