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CAS Casualty Loss Reserve Seminar September 11, 2001

CAS Casualty Loss Reserve Seminar September 11, 2001. Reserving for Asbestos Pure IBNR. Kevin M. Madigan MHL/Paratus. Reserving for Asbestos Pure IBNR. May have significant Asbestos pure IBNR exposure

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CAS Casualty Loss Reserve Seminar September 11, 2001

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  1. CAS Casualty Loss Reserve SeminarSeptember 11, 2001 Reserving for Asbestos Pure IBNR Kevin M. Madigan MHL/Paratus

  2. Reserving for Asbestos Pure IBNR • May have significant Asbestos pure IBNR exposure • Have significant policy data issues • e.g., old policies/slips not in systems • Lack valuable qualitative information High Excess (Re)Insurers:

  3. Reserving for Asbestos Pure IBNR • Research known asbestos defendants • Match against policy database • May take significant effort to build DB • Use historical experience to project IBNR How to Deal With These Issues?

  4. Reserving for Asbestos Pure IBNR • We have developed 2 report year methods inspired by: Using Experience to Project Pure IBNR • [1] Cross, Susan L. and Doucette, John P., “Measurement of Asbestos Bodily Injury Liabilities”, PCAS, Vol LXXXIV, Nos. 160 and 161, pgs 187 -300 • [2] Haidu, Jim, “Estimating a Reinsurer’s Liabilities for Asbestos and Environmental Losses”, 1996 CAS CLRS

  5. Reserving for Asbestos Pure IBNR • Both methods use (report year) actual or modeled losses to arrive at a factor that is applied to exposed policy limits Using Experience to Project Pure IBNR • We are implicitly assuming the existence of modeled losses at the account or policy level • We are modeling GROSS losses

  6. Reserving for Asbestos Pure IBNR Using Experience to Project Pure IBNR • Method 1 uses account experience • Method 2 uses policy experience • Should any of the historical experience be excluded?

  7. Reserving for Asbestos Pure IBNR • “Pricing” Approach Method I: • Allocate experience to layers • Calculate burn rates • Apply to potential IBNR policies

  8. Reserving for Asbestos Pure IBNR • Allocate experience to layers Method I: • Each account has an actual (closed accounts) or modeled (open accounts) annual loss distribution

  9. ABC Asbestos Co. Insulations R Us Acme Widgets Burn Rate Account: TOTAL Annual Loss: $35,000,000 $16,000,000 $250,000 $51,250,000 Layers $0 $500,000 $500,000 $0 $250,000 $750,000 50.00% $500,000 $1,000,000 $500,000 $0 $0 $500,000 33.33% $1,000,000 $5,000,000 $4,000,000 $0 $0 $4,000,000 33.33% $5,000,000 $10,000,000 $5,000,000 $0 $0 $5,000,000 33.33% $10,000,000 $20,000,000 $10,000,000 $0 $0 $10,000,000 33.33% $20,000,000 $30,000,000 $10,000,000 $10,000,000 $0 $20,000,000 66.67% $30,000,000 $40,000,000 $5,000,000 $6,000,000 $0 $11,000,000 36.67% Reserving for Asbestos Pure IBNR • Calculation of Burn Rates Method I: • Example for Report Year 19XX

  10. Layer RY 1990 RY 1991 RY 1992 $0 $500,000 45% 70% 46% 67% 40% 80% $500,000 $1,000,000 44% 68% 46% 67% 40% 80% $1,000,000 $5,000,000 42% 64% 25% 52% 40% 80% $5,000,000 $10,000,000 23% 45% 12% 40% 35% 78% $10,000,000 $20,000,000 15% 34% 1% 5% 30% 75% $20,000,000 $30,000,000 2% 16% 0% 0% 12% 46% $30,000,000 $40,000,000 1% 10% 0% 0% 3% 37% Reserving for Asbestos Pure IBNR • Calculation of Burn Rates Method I: • Ideally want burn rate confidence intervals, from which baseline confidence intervals can be selected for each layer Burn Rate Confidence Intervals

  11. Reserving for Asbestos Pure IBNR • Apply Burn Rates to potential IBNR policies Method I: • Requires assumptions regarding: • Reporting Pattern(s) • Trend Assumptions • e.g., 2% annual decay in burn rate • Exposed Policy Limits

  12. Year % Reported Trend Factor Projected Ultimate Losses 1 10.4% 0.980 $13,200,299 2 9.4% 0.960 $11,717,663 3 8.5% 0.941 $10,424,130 4 7.7% 0.922 $9,291,765 5 7.1% 0.904 $8,297,446 6 6.4% 0.886 $7,421,905 7 5.9% 0.868 $6,648,983 8 5.4% 0.851 $5,965,055 9 4.9% 0.834 $5,358,567 10 4.5% 0.817 $4,819,680 11 4.2% 0.801 $4,339,976 12 3.8% 0.785 $3,912,226 13 3.5% 0.769 $3,530,194 14 3.3% 0.754 $3,188,488 15 3.0% 0.739 $2,882,427 16 2.8% 0.724 $2,607,937 17 2.6% 0.709 $2,361,460 18 2.4% 0.695 $2,139,885 19 2.2% 0.681 $1,940,481 20 2.0% 0.668 $1,760,847 $111,809,413 TOTAL: Reserving for Asbestos Pure IBNR Lower limit of C.I. of Burn Rate for Layer: 26% Exposure in Layer: $500,000,000 • Apply Burn Rates Method I:

  13. Reserving for Asbestos Pure IBNR Comparison of Methods: • Method I computes an annual ‘rate’ for each layer, and ‘charges’ the exposed policies the corresponding ‘price’. • Method II computes one factor to be applied to the limits of each policy

  14. Reserving for Asbestos Pure IBNR • We have a wide assortment of attachment points and policy limits, so it hardly seems right to apply the same factor to each policy. • Does a $25M x $200M policy have the same exposure to loss as a $4M x $1M policy? • Of course not! • But wait!

  15. Reserving for Asbestos Pure IBNR Exposed policy limits are ‘adjusted’ as follows: Method II: Adjusted exposure = TPE * Pr( GUL > AP) where: TPE = Total Policy Exposure GUL = Ground-Up Loss AP = Policy Attachment Point

  16. Reserving for Asbestos Pure IBNR • Calculate historical ratios of loss to adjusted exposure for each report year (let’s call them loss cost factors) Method II: • Select a base line confidence interval for the loss cost factors • Make assumptions regarding reporting pattern(s) and cost trend(s)

  17. Adjusted Exposure Policy Att Point Pr(GUL > AP) Policy Limit Policy Loss $1,000,000 40.0% $500,000 $200,000 $2,500 $1,000,000 40.0% $1,500,000 $600,000 $2,500 $5,000,000 30.0% $4,000,000 $1,200,000 $0 $10,000,000 20.0% $15,000,000 $3,000,000 $0 $15,000,000 10.0% $5,000,000 $500,000 $5,000,000 $20,000,000 5.0% $5,000,000 $250,000 $0 $25,000,000 1.0% $25,000,000 $250,000 $1,000 TOTALS: $6,000,000 $5,006,000 LOSS COST FACTOR: 0.834 Reserving for Asbestos Pure IBNR • Calculate ratios of loss to adjusted exposure Method II: • Example: RY 19xx

  18. Year % Reported Trend Factor Product 1 10.4% 0.980 0.102 2 9.4% 0.960 0.090 3 8.5% 0.941 0.080 4 7.7% 0.922 0.071 5 7.1% 0.904 0.064 6 6.4% 0.886 0.057 7 5.9% 0.868 0.051 8 5.4% 0.851 0.046 9 4.9% 0.834 0.041 10 4.5% 0.817 0.037 11 4.2% 0.801 0.033 12 3.8% 0.785 0.030 13 3.5% 0.769 0.027 14 3.3% 0.754 0.025 15 3.0% 0.739 0.022 16 2.8% 0.724 0.020 17 2.6% 0.709 0.018 18 2.4% 0.695 0.016 19 2.2% 0.681 0.015 20 2.0% 0.668 0.014 0.717 Trended Projected Loss Cost Factor: Reserving for Asbestos Pure IBNR 0.834 Baseline Loss Cost Factor: Method II: • Select a base line for the loss cost factors 0.860

  19. Adjusted Exposure Projected Losses Att Point Pr(GUL > AP) Limit $25,000,000 1.000% $5,000,000 $50,000 $35,850 $40,000,000 0.800% $10,000,000 $80,000 $57,360 $75,000,000 0.600% $25,000,000 $150,000 $107,550 $125,000,000 0.400% $25,000,000 $100,000 $71,700 $250,000,000 0.325% $50,000,000 $162,500 $116,513 TOTALS: $115,000,000 $542,500 $388,973 Reserving for Asbestos Pure IBNR Method II: • Make assumptions regarding reporting pattern(s) and cost trend(s) Trended Projected Loss Cost Factor: 0.717 Potential Policies

  20. Reserving for Asbestos Pure IBNR • Loss trend may be (probably is?) positive, or trend rate may not be constant • Policy “buy backs” • Distinguish products liability from other liability • Not only source of “pure” IBNR • Commutation strategy • Reinsurance collections/collectibility Other Issues:

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