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Premium Allocation Facts and Theories: Methodology

This presentation discusses the methodology of premium allocation in insurance, including the impact on key performance indicators and risk behavior. It also explores the factors that determine what needs to be paid, who should pay for it, and when costs should be recognized. The speaker provides insights on risk management opportunities and ways to improve KPIs. Examples and comparisons of property and automobile liability allocations are included.

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Premium Allocation Facts and Theories: Methodology

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  1. Premium AllocationFacts and Theories: Methodology NY RIMS Breakfast Meeting June 21, 2012 Pam Ferrandino, EVP, Willis National Casualty Practice Leader Alex Levine, Willis National Casualty Practice

  2. Creativity in Insurance?? • Now what…. • We have a solid understanding of: • Expenses • Cash • Balance Sheet • How do these impact your Key Performance Indicators (KPIs) • How can Risk Management improve KPI’s

  3. Designing the Allocation • What has to be paid? • How much must be collected? • Who will pay it? • When will it be collected? • What are the financial objectives? • Does your allocation affect risk behavior?

  4. Recapping - What has to be paid? • Loss & Loss Expense • What type of losses do I have • What is driving my losses • Which are controllable • Can they be improved • Does geography impact cost • Expenses in addition to loss • Risk Transfer Cost • Risk Financing Cost • Internal Administrative Costs and Other Expenses

  5. Who should pay for it? • Subsidiaries • Divisions • Locations • Subpart of any of the above: • Building • Production Run • Product Line • The Division, Unit or Location driving the losses?

  6. How much to collect? • Retained Loss • Expected or Higher Confidence Level • Policy or Accident Year Projected Ultimate • Calendar Year Paid/Incurred/Ultimate • Expenses • Fixed: Exposure and transaction related • Variable: Loss related • Risk Transfer • Deposit • Audited • Projected if sensitive to a swing based on losses • Other • TBD

  7. When will costs be recognized? • At or before inception? • Monthly, quarterly, annually? • As required by insurer adjustments? • As required by actual cost vs. allocated cost? • When the incident occurs? What is the timing of these ?

  8. Risk Management Opportunities • Measure what you treasure • Increase focus on and implementation of Loss Control • Avoidance : Frequency • Mitigation: Severity • Adherence to optimal Claims Management • Mitigation: Severity • Reduce indirect risk costs • Profit Center Manager Buy-in (Fairness) • Improving KPI’s

  9. If Everything Was This Simple

  10. Allocation Components • Exposure base • Loss experience • Experience Period • Paid/Incurred/Projected Ultimate • Severity Cutoff and impact • Claim Frequency impact • Confidence Level for Projection to be allocated • Weighting for exposure and experience • Credits and Debits for compliance with loss control and claims management best practices. • Caps and Balancing • Future adjustments and assessment features 10

  11. Sample Corporation1/1/2007 Property Allocation Premium Based on % of Total Value 11

  12. Sample Corporation1/1/2007 Property Allocation Premium Based on Property Type 12

  13. Property Allocation Comparison 13

  14. Automobile Liability Exposure Options • Type of vehicle • Annual mileage • State in which garaged • Radius of operations • Rural or urban environment 14

  15. Sample Corporation 1/1/2007 Automobile Liability Allocation Premium Based on Exposure 15

  16. Experience Measures • Number of historical years • Age of historical years • Incurred, paid, or developed losses • Number of claims • Limited or unlimited losses 16

  17. Sample Corporation 1/1/2007 Automobile Liability Allocation Premium Based on Experience 17

  18. Sample Corporation1/1/2007 Automobile Liability Allocation 18

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