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WC - Excess Pricing. A National Accounts (Primary) Perspective Steve Basson The Travelers. Distinctions. Small accounts Guaranteed Cost Pricing tied to Manual Rates (Loss Costs) Basic & Excess Premium is Packaged together Large accounts Typically 1MM of Standard Premium and Up

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slide1

WC - Excess Pricing

A National Accounts

(Primary) Perspective

Steve Basson

The Travelers

distinctions
Distinctions
  • Small accounts
    • Guaranteed Cost
    • Pricing tied to Manual Rates (Loss Costs)
    • Basic & Excess Premium is Packaged together
  • Large accounts
    • Typically 1MM of Standard Premium and Up
    • Retro Rated, Large Deductible or SIR
    • Risk Transfer is Excess of Ded / SIR
    • Significant Tailoring (negotiating) of Excess Price
      • examples

WC - Excess Pricing

overall approach
Overall Approach
  • Determine Loss Costs @ Frequency Layer
  • Layer Price Excess Layers to Clients Retention
  • Layer Price Excess Layers beyond Retention
    • Frequency layer is the base for excess layers
  • Maintain pricing Integrity

WC - Excess Pricing

overall approach4
Overall Approach
  • Layer Price (ex. 250K Retention)

Who owns Cost

1st 100K Client ________

100K - 250K Client ________

250K - 500K Excess (insured) ________

500K - 1MM Excess (insured) ________

1MM - 2MM Excess (insured) ________

2MM - Stat Excess (insured) ________

WC - Excess Pricing

overall approach5
Overall Approach
  • Advantages of Layer Pricing
    • Assigns Costs (properly) to layers
    • Allows a “funding” mentality
    • Promotes better reinsurance buying decisions
      • both facultative & treaty
    • Allows client to make better decisions regarding retention
    • Evaluation - Loss / profitability studies can be done

WC - Excess Pricing

loss costs @ frequency layer
Loss Costs @ Frequency Layer
  • What is the Frequency Layer?
    • 10% Rule
    • Existence of a few losses in a layer
  • Loss Rate or use Frequency / Severity Approach
    • Trend & Develop Losses & Counts
    • Benefit Level Adjustments
    • Compute onleveled Losses
    • Rating done at a Frequency Layer
  • Relate Loss Costs to Exposure
  • Compute Next Years Loss Projection

WC - Excess Pricing

loss costs @ frequency layer 100k example using loss rates
Loss Costs @ Frequency Layer (100K)Example using Loss rates

Yr Proj. Ult Loss OL Payroll Loss Rate

1995 5,553,990 454.5M 1.222

1996 6,344,100 492.5M 1.288

1997 5,598,441 516.8M 1.083

1998 7,074,556 552.0M 1.282 Proj.

1999 8,075,349 618.9M 1.305 1.24

Payroll for 2000 = 650M (est)

Loss Projection at 100K = 8.06M

WC - Excess Pricing

loss costs @ frequency layer8
Loss Costs @ Frequency Layer
  • Loss Rate - Frequency / Severity Approach
    • Approach can be Paid or Incurred
    • Use Internal LDFs
    • Account Specific LDFs for Larger clients
    • Should Loss Rate at several Limits!!!
    • Could have done same process with Frequency & Severity
    • Uniqueness of Large Account LDFs
      • Clients often involved in reserve setting
      • Clients usually involved in settlement
      • Better Risk Mgmnt (Light Duty, etc.)

WC - Excess Pricing

increased limits factors
Increased Limits Factors
  • Internal ILF reviews
    • State Specific (for larger states)
    • Blended w/ NCCI information at higher layers (>= 1MM)
    • Split to Hazard Groups (I - IV)
    • ILFs can be “layer” or “to unlimited / stat”
    • Layer : Layer ILFs determined by division
      • 50K ILF 2.00
      • 100K ILF 1.5
      • 50 - 100K ILF 1.333

WC - Excess Pricing

determine loss rate @ retention
Determine Loss Rate @ Retention
  • Loss Rating Done at Frequency Layer(s)
  • Advantage of Loss Rating at several limits
  • Need to Extend to Retention (if not there already)
  • Some Severity Characteristics may emerge
    • Loss Rating @ ILF-Stat Loss Rating ILF to 100K ILF to 250K

50K 1.64 7,100,000 8,438,000 9,953,000

100K 1.38 8,000,000 9,436,000

250K 1.17 9,020,000

What is the message?

WC - Excess Pricing

determine loss rate @ retention11
Determine Loss Rate @ Retention

Loss Rating @ Expect. Loss ILF Extension to 250K

50K 7,100,000 9,953,000

100K 8,000,000 9,436,000

250K 9,020,000

Need to Determine estimate AT the 250K Retention

Many judgement Calls (different signals)

Client can use to “Accrue” / Budget

Excess Losses are based on this number

NOT discounted for Time Value

WC - Excess Pricing

layer pricing xs layers
Layer Pricing XS Layers
  • Using ILFs - Layer Price Excess Layers
  • Same set of ILFs (State / Hazard Group)
    • Internal ILFs
    • Discounted for Time Value of Money (can be state specific)
    • Room for judgement based on Severity characteristics in frequency layer(s)
    • Credits & Debits are monitored
      • Sold versus Guide

WC - Excess Pricing

layer pricing xs layers13
Layer Pricing XS Layers

ILF Undisc. Discounted Cost Cost (%)

1st 250K 9,000,000

250 - 500 1.065 585,000 439,000(75)

500 - 1MM 1.038 364,000 182,000(50)

1MM + 1.030 298,000 119,200(40)

WC - Excess Pricing

layer pricing xs layers14
Layer Pricing XS Layers
  • ILF Issues
    • How can I charge $X for a layer, when there aren’t any losses?
    • Adjustments should be minimal in higher layers
      • Limit judgement, where there isn’t credibility / predictability
    • How can I adjust the XS price to reflect the (low) severity?
    • Cost Structure needs to be explained in English

WC - Excess Pricing

layer pricing xs layers15
Layer Pricing XS Layers

Claims Excess of 250K (500 LT claims in total)

1995 1996 1997 1998 1999

315 300 325 - -

500

How can we charge X$ Excess of 500K, with no claims?

“Expect 1 (maybe 2) claim(s) per year excess of 250K”?

WC - Excess Pricing

layer pricing xs layers freq per 100 claims
Layer Pricing XS Layersfreq. Per 100 claims

0$ 1 - 25K 25 - 50 50 - 100 100 - 250 250 - 500 500 - 1MM 1MM + Total

6 25.735 70.500 2.800 0.700 0.200 0.040 0.020 0.005 100.000

18 13.610 77.600 5.730 2.400 0.550 0.080 0.020 0.010 100.000

30 11.837 77.800 5.700 3.200 1.300 0.120 0.030 0.013 100.000

42 11.117 78.200 5.500 3.200 1.700 0.170 0.040 0.013 100.000

54 10.293 78.500 5.700 3.300 1.890 0.240 0.060 0.014 100.000

66 9.235 78.500 6.080 3.630 2.100 0.350 0.080 0.025 100.000

78 8.225 78.100 6.500 4.000 2.600 0.440 0.100 0.035 100.000

. . . . . . . . . .

. . . . . . . . . .

120 7.590 77.900 6.600 4.300 2.800 0.600 0.140 0.070 100.000

WC - Excess Pricing

layer pricing xs layers17
Layer Pricing XS Layers

Expect @ 500 Claims 6 18 30 42 54 Ult.

250 - 500 .20 .40 .60 .85 1.2 3.3

500 - 1MM .10 .10 .15 .20 .30 .80

1MM + .025 .050 .065 .065 .070 .40

Actual (tot 500 Claims) 6 18 30 42 54 Ult

250 - 500 0 0 1 1 2 ?

500 - 1MM 0 0 0 0 0 ?

1MM + 0 0 0 0 0 ?

WC - Excess Pricing

layer pricing xs layers18
Layer Pricing XS Layers

Layer Avg Expect # Cost

250 - 500 75,000 3.30 547,500

500 - 1MM 150,000 .80 320,000

1MM + 600,000 .40 240,000

WC - Excess Pricing

layer pricing xs layers19
Layer Pricing XS Layers

COMPARISON (Undiscounted)

Using ILFs Using Freq.

250 - 500 585,000 547,500

500 - 1MM 364,000 320,000

1MM + 298,000 240,000

Note: This approach can also be used on

Frequency Layers

WC - Excess Pricing

layer pricing xs layers20
Layer Pricing XS Layers

Discounting for Time Value of Money

  • Generally Use Paid LDFs
    • State Specific where possible
    • Very sensitive to Settlement practices
    • Little to no tailoring account x account
  • For 250 x 250 Layer
    • Subtract 250K curve from 500K curve (ILF Adj)
    • Discount to time zero

WC - Excess Pricing

layer pricing xs layers21
Layer Pricing XS Layers

WC - Excess Pricing

misc wc excess issues
Misc. WC Excess Issues
  • Multi-Claimant Events
  • Aggregate in XS Layers
  • Medical Inflation
  • NCCI ELPFs / ILFs
  • Risk Loads

WC - Excess Pricing

wrap up
Wrap Up
  • Workers Comp Excess Pricing - Large Accounts
    • Layer Priced of Frequency Layers
      • Some tailoring for severity
    • Extension / Layer Pricing of Insured Layers
      • Cross Check with Frequency Approach
    • Discount for Time Value of Money
  • Make decisions
    • Pricing, Retentions
    • Reinsurance

WC - Excess Pricing