pricing excess and surplus lines (com-4) ronald j. herrig, fcas markel corporation deerfield,...
TRANSCRIPT
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Pricing Excess and Surplus Lines(COM-4)
Ronald J. Herrig, FCAS
Markel Corporation
Deerfield, Illinois
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What Is the Surplus Lines Industry?
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The Surplus Lines industry provides a market for hard-to-place risks; risks the standard market chooses not to write.
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Why are these risks not written by the standard market?
• Distressed Risks/Markets
• Unique Risks
• High-Capacity Risks
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Distressed Risks – Something about the risk itself
that makes it undesirable to the standard market.
• Start-Up Manufacturer – No track record
• New Physician
• Physician with a History of Drug-Abuse
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Distressed Markets – Something about the
entire category of risks that makes it undesirable to the standard market.
• OB/GYNs - SOL
• Junk Yards
• Nutritional Supplements – What’s the new Ephedra?
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Unique Risks – Characteristics of the risk make it too unusual to fall within standard U/W classes.
• Fireworks Accounts
• Shamu Transportation
• Architectural Projects
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High-Capacity Risks – Risks needing high limits of protection and in-depth underwriting
• High Rise Buildings
• Directors & Officers
• Aviation Property/Liability
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How Can Surplus Lines Companies write this Junk
(Profitably)?
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By being Fast, Fluid and Flexible!
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Regulation
• No need to file rates/forms
• Licensing required only in state of domicile
• Not an unregulated industry, though
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Regulations That Do Apply
• Annual Statements
• Triennial Reviews
• Market Conduct Exams
• Risk-Based Capital Requirements
• SEC Requirements
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Adaptable Policies
• Claims-Made Coverage
• ALAE included within Limits
• Sublimits
• Customized Endorsements
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And most importantly…
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Expert Underwriting
Underwriters need:• to understand their
company’s appetite for risk – and abide by it
• knowledge of book’s underlying statistics
• to understand each insured and its associated risks
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Claims Handling
• Knowledgeable Claim Handlers
• Standardized Approach to Claims Reserving
• Consistent Approach to Claims Reserving
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Effects of the Market Cycle
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Hard Market and E&S
• Admitted Companies become more selective.
• Surplus Lines applications increase dramatically.
• Rates Firm, Coverages Contract.
• Small Decrease in Admitted Market can increase Non-Admitted Market Substantially.
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Change in Applications(2000 Baseline = 100 units)
0
50
100
150
200
250
300
350
Products Med Mal
20002001200220032004
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Soft Market and E&S
• Admitted Companies become less selective in their Underwriting.
• Fewer Risks are Declined.
• E&S companies develop new products to maintain volume.
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Examples of New Products
• Employment Practices Liability
• Tenant Discrimination
• Environmental Impairment Liability
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EPLI(1994 Baseline = 100 units)
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
1994 1996 1998 2000 2002 2004
E.P. (000)
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New Product Development
1. Opportunity identification
2. Product design
3. Testing
4. Product introduction
5. Life-cycle management
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Opportunity Identification
• Broker Recommendations
• Marketing
• New Product Teams
• Media
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Product Design
• Target Market
• Coverages
• Policy Wording
• Rating
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Testing
• Beta-Test on Select Market
• Honest Feedback
• Rate, rate, rate
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Ratemaking Methods
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Ratemaking Methods for New Products
• Pure Premium Methods
• Piggy-back Method
• Festus Method
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Pure Premium Methods
1. Ultimate Losses / Ultimate Exposures
2. Frequency x Severity
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Pure Premium Methods
1. Trend individual ‘ground-up’ losses; remove base deductible
2. Develop losses; cap at basic limit
3. Aggregate all adjusted losses.
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Pure Premium MethodTreatment of Exposures
1. Multiply individual units of exposure by applicable relativity factors (state, class code, claims-made step-rate, etc.)
2. Aggregate all adjusted exposures
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Pure Premium MethodCalculation of Rate
Pure Premium =
Aggregate Adjusted Losses
Aggregate Adjusted Exposures
Base Rate = Pure Premium
Permissible L/R
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Pure Premium Method
• Works well for an existing product
• Works best for a product with a well-defined exposure base (doctors, employees)
• Requires detailed loss and exposure info (claim-by-claim, policy-by-policy)
• Actuarially sound
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Piggy-back Method
1. Start with Comparable Product
2. Adjust Rates for Coverage differences
3. Adjust for Limits/Deductible differences
4. Adjust for Expense differences
5. Others?
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Piggy-back Method
• Works well for Enhancement of Existing Product
• Requires knowledge of Comparable Product• Judgmental• Danger of being too
Conservative/Aggressive?• Difficult to Support to Others
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The Festus Method
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The Festus Method
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Ratemaking Tools
• Imagination!
• Innovation!
• Intuition!
• Internet!
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Useful Sites
• www.google.com – Big Brother is Watching!
• www.firstgov.gov - U.S. Government’s Official Web Portal
• www.bls.gov - Bureau of Labor Statistics
• www.federalreserve.gov - Interest Rates
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Other Useful Websites
• www.cas.org
• www.cnn.com
• Where ever else the web may take you!
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