paul budde, ph. d., acas, maaa senior vice president using catastrophe models for pricing: the...
DESCRIPTION
3 FHCF Ratemaking FHCF is a tax-exempt state trust fund administered by the Florida State Board of Administration FHCF is a tax-exempt state trust fund administered by the Florida State Board of Administration Mandatory reinsurer of all residential property in Florida (excl. surplus lines insurers and reinsurers) Mandatory reinsurer of all residential property in Florida (excl. surplus lines insurers and reinsurers) Limit available Limit available 2002/03 Contract Year$11.00 billion Subsequent season capacity$9.62 billion 2002 annual premiums = $468 million 2002 annual premiums = $468 million Projected assets at 12/31/02 = $4.92 billion Projected assets at 12/31/02 = $4.92 billionTRANSCRIPT
Paul Budde, Ph. D., ACAS, MAAAPaul Budde, Ph. D., ACAS, MAAASenior Vice PresidentSenior Vice President
Using Catastrophe Models for Pricing: Using Catastrophe Models for Pricing: The Florida Hurricane Catastrophe FundThe Florida Hurricane Catastrophe Fund
CAS Special Interest Seminar on CAS Special Interest Seminar on Catastrophe Risk ManagementCatastrophe Risk ManagementOctober 8, 2002October 8, 2002
Florida Hurricane Catastrophe FundFlorida Hurricane Catastrophe Fund
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Florida Hurricane Catastrophe FundFlorida Hurricane Catastrophe FundFHCF RatemakingFHCF Ratemaking
FHCF is a tax-exempt state trust fund administered by the Florida FHCF is a tax-exempt state trust fund administered by the Florida State Board of AdministrationState Board of Administration
Mandatory reinsurer of all residential property in Florida (excl. Mandatory reinsurer of all residential property in Florida (excl. surplus lines insurers and reinsurers)surplus lines insurers and reinsurers)
Limit availableLimit available
2002/03 Contract Year2002/03 Contract Year $11.00 billion$11.00 billion
Subsequent season capacitySubsequent season capacity $9.62 billion$9.62 billion
2002 annual premiums = $468 million2002 annual premiums = $468 million
Projected assets at 12/31/02 = $4.92 billionProjected assets at 12/31/02 = $4.92 billion
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Florida Hurricane Catastrophe FundFlorida Hurricane Catastrophe FundFHCF RatemakingFHCF Ratemaking
$4.9 billion in net assets
$461 million
2002 Hurricane Season2002 Hurricane Season Subsequent Season*Subsequent Season*(Assuming $11B loss in 2002)(Assuming $11B loss in 2002)
$11.00 B$11.00 B
$6.1 billion from bonding2.21% assessment
$9.15 billion from bonding3.79% assessment
$9.62 B$9.62 B
* Bonding Aamounts and assessment levels as reported in May 14, 2002 Bonding Capacity Analysis* Bonding Aamounts and assessment levels as reported in May 14, 2002 Bonding Capacity Analysis
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CoverageCoverageFHCF RatemakingFHCF Ratemaking
Covered events are all hurricanes causing property damage in Covered events are all hurricanes causing property damage in FloridaFlorida
Coverage includes additional living expenses beginning in 2002Coverage includes additional living expenses beginning in 2002 5% of reimbursable loss added (within limit) for LAE5% of reimbursable loss added (within limit) for LAE Companies select 45%, 75% or 90% coverageCompanies select 45%, 75% or 90% coverage Companies have individual retentions and limitsCompanies have individual retentions and limits
Retention = 8.03106 x FHCF premium (2002/03)Retention = 8.03106 x FHCF premium (2002/03)
Max. reimbursement = 23.5254 x FHCF premium (2002/03, projected)Max. reimbursement = 23.5254 x FHCF premium (2002/03, projected)
No reinstatementNo reinstatement
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2002/03 Industry Coverage2002/03 Industry CoverageFHCF RatemakingFHCF Ratemaking
FHCF Layer88.08% of
$12.49 billion excess of $3.84 billion
$3.84 B$3.84 B
$16.33 B$16.33 B
1-in-9.5 yrs1-in-9.5 yrs
1-in-45 yrs1-in-45 yrs
From Modeling to PricingFrom Modeling to Pricing
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How is/are catastrophe models selected?How is/are catastrophe models selected?FHCF RatemakingFHCF Ratemaking
Florida Commission on Hurricane Loss Projection MethodologyFlorida Commission on Hurricane Loss Projection Methodology Established in 1995Established in 1995
Role, as defined in Section 627.0628(3)(a), Florida Statutes:Role, as defined in Section 627.0628(3)(a), Florida Statutes: ““The commission shall consider any actuarial methods, principles, The commission shall consider any actuarial methods, principles,
standards, models, or output ranges that have the potential for standards, models, or output ranges that have the potential for improving improving the accuracy of or reliability of the hurricane loss projectionsthe accuracy of or reliability of the hurricane loss projections used in used in residential property insurance rate filings. The commission shall, from residential property insurance rate filings. The commission shall, from time to time, adopt findings as to the accuracy or reliability of particular time to time, adopt findings as to the accuracy or reliability of particular methods, principles, standards, models, or output ranges.” (emphasis methods, principles, standards, models, or output ranges.” (emphasis added)added)
FHCF uses all models deemed “acceptable” by Methodology FHCF uses all models deemed “acceptable” by Methodology CommissionCommission ““to the extent feasible,” the FSBA must “employ actuarial methods, to the extent feasible,” the FSBA must “employ actuarial methods,
principles, standards, models, or output ranges found by the principles, standards, models, or output ranges found by the Commission to be accurate or reliable” in producing rates for the Commission to be accurate or reliable” in producing rates for the FHCF reimbursment premium. (Section 627.0628(3)(b), F.S.)FHCF reimbursment premium. (Section 627.0628(3)(b), F.S.)
Models used for 2002/2003: AIR, ARA, Catalyst, EQE, RMSModels used for 2002/2003: AIR, ARA, Catalyst, EQE, RMS
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What Data to be Modeled?What Data to be Modeled?FHCF RatemakingFHCF Ratemaking
Start with data from prior year data callStart with data from prior year data call
CleansedCleansed
Adjusted, as necessaryAdjusted, as necessary
Trended forward one yearTrended forward one year
AggregatedAggregated
FHCF Goal: Provide all modelers with same data in a FHCF Goal: Provide all modelers with same data in a format that minimizes assumptions neededformat that minimizes assumptions needed
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How well does the data being modeled represent How well does the data being modeled represent actual loss potential?actual loss potential?
FHCF RatemakingFHCF Ratemaking
Invalid ZIP CodesInvalid ZIP Codes Law and OrdinanceLaw and Ordinance Losses to FHCF layerLosses to FHCF layer
Pure premium to the layerPure premium to the layer
No reinstatementsNo reinstatements Internal FFT aggregation model used to limit losses to one limitInternal FFT aggregation model used to limit losses to one limit
ReMetrica – simulation to verifyReMetrica – simulation to verify
2.1% reduction2.1% reduction
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How can we combine modeled results?How can we combine modeled results?FHCF RatemakingFHCF Ratemaking
Simple averageSimple average
Equal weight to each resultEqual weight to each result
Median valueMedian value
Drop high and lowDrop high and low
““Mode”Mode”
Some answers are closer to others. Ought those get more weight?Some answers are closer to others. Ought those get more weight?
Weighted averageWeighted average
5 / 20 / 50 / 20 / 5 weighting scheme5 / 20 / 50 / 20 / 5 weighting scheme
If a model is revised, or if the mix of models changes, will overall If a model is revised, or if the mix of models changes, will overall changes be significant? changes be significant? (stability vs. accuracy)(stability vs. accuracy)
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Credibility theory?Credibility theory?FHCF RatemakingFHCF Ratemaking
What credibility weight to What credibility weight to
Prior year modeling?Prior year modeling?
Prior versions of a model?Prior versions of a model?
FHCF has given full credibility to most recent modeling FHCF has given full credibility to most recent modeling workwork
Best expression of actual exposureBest expression of actual exposure
With stochastic simulations of 50,000+ years, modeling results With stochastic simulations of 50,000+ years, modeling results represent a complete “historical” picturerepresent a complete “historical” picture
Assumes models are always improving, never regressingAssumes models are always improving, never regressing
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How much total premium do we need to charge?How much total premium do we need to charge?FHCF RatemakingFHCF Ratemaking
Excess losses to layerExcess losses to layer
Retention and limit adjustmentRetention and limit adjustment
Post-model adjustment factorsPost-model adjustment factors
Investment income creditInvestment income credit
Fixed expense loadingsFixed expense loadings
Premium creditsPremium credits
2002/03 FHCF premium $467.6 million2002/03 FHCF premium $467.6 million
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How is the premium allocated to risks?How is the premium allocated to risks?FHCF RatemakingFHCF Ratemaking
Primary Rating FactorsPrimary Rating Factors
Location, location, location!Location, location, location!
Type of businessType of business
DeductiblesDeductibles
ConstructionConstruction
Premium creditsPremium credits
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How are loss costs combined?How are loss costs combined?FHCF RatemakingFHCF Ratemaking
Detailed ZIP Code level loss costs from 3 Detailed ZIP Code level loss costs from 3 modelersmodelers
Combined through straight averageCombined through straight average
Used to define territories and allocate premium Used to define territories and allocate premium across the different risk classificationsacross the different risk classifications
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Assigning ZIP Codes to TerritoriesAssigning ZIP Codes to TerritoriesFHCF RatemakingFHCF Ratemaking
Residential Residential base (2%) base (2%) deductibledeductible
Loss costs Loss costs for blended for blended constructionconstruction
RankedRanked
Rating Region Loss Costs and Territory Definitions
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25Territories
Aver
age
Loss
Cos
ts
Ave LCsCentersExponentialLinear
Mix 79:21Mix 21:79Graduated
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TerritoriesTerritoriesFHCF RatemakingFHCF Ratemaking
3 1
1
7
11
11
7
6
8
10
88
5 6
6
7
6
6
7
5
5
9
10
6
534
6
3
3
3
4
4
3
4
22
2
3223
2
31
1
3
1
21
1
1
1
2
4
5
4
867
5
5 1
32
11
1
1
11
11
1421
2
1
1 2
22
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2002 RatingRegions
Not Rated1234567891011121314151617181920212223
Florida Hurricane Catastrophe Fund
Entire State
Paragon Reinsurance RiskManagement Services, Inc.
Proposed 2002 Rating Territories by 5-Digit ZIP Code
j:\fhcf\2002\ratemaking\maps\2002prelim temp2.wor (layout1)3/02
25 Regions25 Regions
ZIP Code ZIP Code definitionsdefinitions
Based on Based on losses to losses to layerlayer
Revised Revised annuallyannually
Changes Changes temperedtempered
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ReferencesReferencesFHCF RatemakingFHCF Ratemaking
Florida Hurricane Catastrophe FundFlorida Hurricane Catastrophe Fund
2002 Ratemaking Formula Report to the 2002 Ratemaking Formula Report to the
Florida State Board of AdministrationFlorida State Board of Administration
March 28, 2002March 28, 2002
Available through the FHCF website:Available through the FHCF website:
http://www.fsba.state.fl.us/fhcf/http://www.fsba.state.fl.us/fhcf/
(Look for meeting materials from the 28 March 2002 Advisory (Look for meeting materials from the 28 March 2002 Advisory Council meeting, amended to final mitigation levels)Council meeting, amended to final mitigation levels)
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Speaker NotesSpeaker NotesFHCF RatemakingFHCF Ratemaking
Paul E. Budde, Ph.D., ACAS, MAAAPaul E. Budde, Ph.D., ACAS, MAAASenior Vice PresidentSenior Vice PresidentBenfield BlanchBenfield Blanch3600 W 803600 W 80thth St StMinneapolis, MN 55431Minneapolis, MN [email protected]@benfieldgroup.com