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Introduction to Exposure and Experience Pricing Methods: A Case Study

This seminar explores exposure and experience pricing methods using a real-life case study. Learn about reinsurance proposals, pricing information, exposure rating, experience rating, and the comparison of results.

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Introduction to Exposure and Experience Pricing Methods: A Case Study

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  1. Introduction to Exposure and Experience Pricing MethodsA Case StudyJohn BuchananCAS Ratemaking Seminar – REI 3March 17, 2008 CAS RM 2008 – Introduction to Exposure and Experience

  2. Agenda • Introduction to Case Study (5 mins – John) • Reinsurance Proposal • Pricing Information Received • Exposure Rating (30 mins – Halina) • Basics of Method • Indications • Experience Rating (30 mins – Kyle) • Basics of Method • Indications • Comparison of Results (10 mins – John) • Next Steps • Experience vs. Exposure and Underwriting Cycle • Questions

  3. Reinsurance Proposal • Layer $100,000 xs $100,000 • Estimated Premium: $40,000,000 • Rapid growth recently • Was $10,000,000 six years ago • Large apparent rate increases • GL Business • Southeast US • Underwriting • Business has been sold a few times during 10 year history to different fronting carriers • Latest sold two years ago

  4. Pricing Information Received • Premiums • by Class Code • by Policy Limit • Historical loss ratios • Claim listings • Reporting threshold of $50,000 • Current evaluation • Histories • Claims • Reserve stair-stepping • Higher than average expenses

  5. Exposure and Experience Pricing • Presentations…

  6. What’s your final answer? • Experience for this layer is half of the exposure • Exposure = 3.92% (1.57 mm) • Experience = 1.85% (0.74 mm) • Trick Question… • More investigation needed

  7. Exposure Pricing • Don’t just look at layer you are pricing (100 xs 100k) • Look at layers below and above as well • Look at Exposure burns and claim counts

  8. Experience Pricing • Ditto for Experience Pricing • Use same layers for easier comparison

  9. Exposure and Experience Comparison • In this case study, there is an inconsistent relationship as move up the attachment points • While the low layer experience is about half of exposure, the upper layers are about equal to exposure • Need more investigation to reconcile and help solve the puzzle(next session – REI4)

  10. Traditional Methods Recap • Experience • Relevant parameter defaults/overrides for: • LDFs (excess layers) • Trends (severity, frequency, exposure) • Rate changes • LOB/Hazard Grp indicators • Adjust for historical changes in: • Policy limits • Exposure differences • Careful “as-if” • Exposure • Relevant parameters defaults/overrides for: • ILFs (or ELFs, PropSOLD) • Direct loss ratios (on-level) • ALAE loads • Policy profile (LOB, HzdGrp) • Limit/subLOB allocations • Adjust for expected changes in: • Rating year policy limits • Rating year exposures expected to be written

  11. Underwriting Cycle - AY

  12. Underwriting Cycle – AY vs. CY

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