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## PowerPoint Slideshow about 'Specialty Lines Pricing' - moeshe

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Surety Excess-of-LossReinsurance Pricing

- Experience Rating
- Exposure Rating
- Economic Conditions
- Market Conditions

Surety Bonding: Estimation of Loss Amounts

- Contract Balances(Revenues)
- Cost to Complete (Liabilities)
- Other Costs

Contract Balance = Original Contract Price

+/- Change Orders

- Cash Payments Made by Obligee to Principal or Surety

Surety Bonding: Estimation of Loss Amounts

Cost to Complete: comprised of

-Variable Costs: Labor, Materials, Equipment

- Fixed Costs: Subcontractors & Suppliers

Surety Bonding: Estimation of Loss Amounts Other Costs:

-Liquidated Costs

- Unpaid Suppliers

- Subcontractors’ Current Payments Due

- Contingencies

Surety Bonding: Estimation of Loss AmountsExperience Rating: Loss Data – What to Include?

- Contract Balances
- Collateral– cash or secured by LOC
- Salvage (e.g. indemnities) – only when realized
- Anticipated Salvage – no

Surety Bonding Treatment of ALAE

- Proportional Treaties – ProRata in addition
- Excess-of-Loss – included in definition of loss
- SAA - ALAE appr. 5% of aggregate losses (decreasing trend over time)

Experience Rating:Parameter Selection

- Loss Development
- Trend– Severity / Frequency
- Rate Level

Exposure Rating: Limits Profiles

- Per Bond vs. Per Principal
- Max Work Program vs. Bonded Work-on-Hand

Exposure Rating: Limits Profile Adjustments

- Co-Surety %’s
- Bonded/Unbonded Split
- Utilization
- PML
- Benefit of Inuring Reinsurance

Def. - Ratio of bonded work-on-hand to total limits

(may be ratio to either bonded or unbonded)

Dependent upon:

- Amount of Construction Work (esp. public works)

- Seasonality

- Type of Project

- Project Duration

Exposure Rating: Utilization Def. - Probable Maximum Loss as a % of Exposure (may be relative to unbonded, bonded, or utilized work-on-hand)

Varies by:

- Region

- Contractor Size

- Contractor Type

Exposure Rating: PML’s1) Using cessions %’s on a per-bond basis, determine total retained % for portfolio

2) Judgmentally select per-contractor retained %’s by band, making sure to balance back to total retained %

3) Per-contractor retained %’s should decrease with contractor size

Exposure Rating: Steps to Estimate Benefit of InuringAlternate Method (where available)

1) For each contractor (or limits band), obtain number of bonds, work program limit & max bond limit

2) Assume largest bond ceded according to schedule

3) Calculate average limit excluding largest bond, apply cessions schedule.

4) Add retained amounts from 2) & 3)

5) Other possibilities, e.g. 2x or 3x average

Exposure Rating: Steps to Estimate Benefit of InuringExposure Rating Size of Loss Curves

- Loss-to-Value (PML)
- Derived from coordinated loss & exposure data (preferable: remaining exposure @time of loss)
- Alternate Method – Frequency/Severity approach, where severities are derived from loss data and frequencies are based on default rate for implicit contractor ratings

Surety Bonding Commercial (Non-Contract) Surety

- Historically low limits and small portion of XS
- Gradually including larger and riskier classes
- Historical loss ratios ~ 20%

Surety Bonding: Historical Perspective

- SAA - 30 year (net) loss ratio result = 40%
- Worst Years - 1975/76 (recession) and 1986/87 (expansion) Loss ratios ~ 70%-75%
- Best Years - 1989-1999 (recession & expansion)

Loss ratios in the 30%’s throughout the period

- Conclusion: Surety results not correlated w/economy

Surety Bonding: Profitability

- Contractor Profits / ROE’s follow the economy w/ peaks in mid-’80’s and mid to late ’90’s, trough in the early ’90’s
- Surety Results stable since late ’80’s
- Initial Conclusion: Surety results independent of construction industry profitability
- Alternate Conclusion (pending updated results for 2000/2001): Surety results decline in the face of extended periods of profitability and economic prosperity

Surety Bonding: Can We Anticipate the Cycle?

- Difficult for High Excess-of-Loss – Random Events
- Consecutive Years generally correlated
- Underpricing of underlying business not as apparent as in other P/C lines
- Enhancements: 1) Improved rate monitoring techniques, 2) Econometric forecasting

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