Using Catastrophe Models for by GarrettPendergast

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									Using Catastrophe Models for Pricing:
The Florida Hurricane Catastrophe Fund




CAS Special Interest Seminar on   Paul Budde, Ph. D., ACAS, MAAA
Catastrophe Risk Management             Senior Vice President
October 8, 2002
Florida Hurricane Catastrophe Fund
FHCF Ratemaking
Florida Hurricane Catastrophe Fund

    FHCF is a tax-exempt state trust fund administered by the Florida
     State Board of Administration
    Mandatory reinsurer of all residential property in Florida (excl.
     surplus lines insurers and reinsurers)
    Limit available
         2002/03 Contract Year $11.00 billion
         Subsequent season capacity       $9.62 billion

    2002 annual premiums = $468 million
    Projected assets at 12/31/02 = $4.92 billion




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   FHCF Ratemaking
    Florida Hurricane Catastrophe Fund
            2002 Hurricane Season                                    Subsequent Season*
                                                                 (Assuming $11B loss in 2002)
$11.00 B

                                                          $9.62 B
               $6.1 billion from bonding
                 2.21% assessment
                                                                        $9.15 billion from bonding
                                                                           3.79% assessment




               $4.9 billion in net assets


                                                                                $461 million

           * Bonding Aamounts and assessment levels as reported in May 14, 2002 Bonding Capacity Analysis

                                                     4
FHCF Ratemaking
Coverage

    Covered events are all hurricanes causing property damage in
     Florida
    Coverage includes additional living expenses beginning in 2002
    5% of reimbursable loss added (within limit) for LAE
    Companies select 45%, 75% or 90% coverage
    Companies have individual retentions and limits
         Retention = 8.03106 x FHCF premium (2002/03)
         Max. reimbursement = 23.5254 x FHCF premium (2002/03, projected)
    No reinstatement




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FHCF Ratemaking
2002/03 Industry Coverage


$16.33 B                                                 1-in-45 yrs




                             FHCF Layer
                              88.08% of
                $12.49 billion excess of $3.84 billion




 $3.84 B                                                 1-in-9.5 yrs




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From Modeling to Pricing
FHCF Ratemaking
How is/are catastrophe models selected?
   Florida Commission on Hurricane Loss Projection Methodology
        Established in 1995
        Role, as defined in Section 627.0628(3)(a), Florida Statutes:
              “The commission shall consider any actuarial methods, principles,
               standards, models, or output ranges that have the potential for improving
               the accuracy of or reliability of the hurricane loss projections used in
               residential property insurance rate filings. The commission shall, from
               time to time, adopt findings as to the accuracy or reliability of particular
               methods, principles, standards, models, or output ranges.” (emphasis
               added)

   FHCF uses all models deemed “acceptable” by Methodology
    Commission
        “to the extent feasible,” the FSBA must “employ actuarial methods,
         principles, standards, models, or output ranges found by the
         Commission to be accurate or reliable” in producing rates for the
         FHCF reimbursment premium. (Section 627.0628(3)(b), F.S.)
        Models used for 2002/2003: AIR, ARA, Catalyst, EQE, RMS

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FHCF Ratemaking
What Data to be Modeled?

FHCF Goal: Provide all modelers with same data in
  a format that minimizes assumptions needed

    Start with data from prior year data call

    Cleansed

    Adjusted, as necessary

    Trended forward one year

    Aggregated

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FHCF Ratemaking
How well does the data being modeled represent
actual loss potential?

    Invalid ZIP Codes
    Law and Ordinance
    Losses to FHCF layer
         Pure premium to the layer
         No reinstatements
              Internal FFT aggregation model used to limit losses to one limit
              ReMetrica – simulation to verify
              2.1% reduction



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FHCF Ratemaking
How can we combine modeled results?
   Simple average
        Equal weight to each result

   Median value
        Drop high and low

   “Mode”
        Some answers are closer to others. Ought those get more weight?

   Weighted average
        5 / 20 / 50 / 20 / 5 weighting scheme
        If a model is revised, or if the mix of models changes, will overall
         changes be significant? (stability vs. accuracy)



                                     11
FHCF Ratemaking
Credibility theory?

    What credibility weight to
         Prior year modeling?
         Prior versions of a model?

    FHCF has given full credibility to most recent modeling
     work
         Best expression of actual exposure
         With stochastic simulations of 50,000+ years, modeling results
          represent a complete “historical” picture
         Assumes models are always improving, never regressing


                                 12
FHCF Ratemaking
How much total premium do we need to charge?

   Excess losses to layer

   Retention and limit adjustment

   Post-model adjustment factors

   Investment income credit

   Fixed expense loadings

   Premium credits

   2002/03 FHCF premium $467.6 million



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FHCF Ratemaking
How is the premium allocated to risks?

 Primary Rating Factors
    Location, location, location!
    Type of business
    Deductibles
    Construction
    Premium credits



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FHCF Ratemaking
How are loss costs combined?


    Detailed ZIP Code level loss costs from 3
     modelers

    Combined through straight average

    Used to define territories and allocate premium
     across the different risk classifications




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FHCF Ratemaking
Assigning ZIP Codes to Territories
                                                                                      R a tin g R e g io n L o s s C o s ts a n d T e r r ito r y D e fin itio n s


   Residential                                   3 .5


    base (2%)
    deductible                                    3 .0               Av e LC s

                                                                     C e n te rs



    Loss costs
                                                                     E x p o n e n t ia l


                                                  2 .5
                                                                     L in e a r




                   Av e ra g e L o s s C o s ts
    for blended                                   2 .0
                                                                     M i x 7 9 :2 1




    construction
                                                                     M i x 2 1 :7 9

                                                                     G ra d u a te d


                                                  1 .5


   Ranked
                                                  1 .0




                                                  0 .5




                                                  0 .0

                                                         1   2   3        4       5       6    7     8    9   10    11     12     13     14    15   16   17   18   19   20   21   22   23   24   25
                                                                                                                         T e r r it o r ie s




                                                                                  16
FHCF Ratemaking
Territories                                          Florida Hurricane Catastrophe Fund
                                    Proposed 2002 Rating Territories by 5-Digit ZIP Code
                                                                                         Entire State




    25 Regions
                        1                    1                       1
                                    1




     ZIP Code
                                2    4               1
                                                                                                                                        1


 
                            2                5               4       1       1                                                                      1

                                                                 4   1                                  1           2




     definitions
                                                                         1                1
                                5    7   6                                   1                  1
                                                 8                                                                          2
                                                         5                           2                                                          2
                                                                     2           3

                                                                                                                                        1                         2
                                                                                                                                    1
                                                                                                            1                   1                             1
                                                                                                                                        1
                                                                                                                                                                      3



     Based on
                                                                                                            3   1


 
                                                                                                                                                                      2
                                                                                                                            1
                                                                                                                                                                          3
                                                                                                                                                         1




     losses to
                                    2002 Rating                                                                     3               2
                                                                                                                                                         2                        3

                                      Regions                                                                               2
                                                                                                                                                                              2
                                                                                                                                                                                      6

                                                                                                                                                2                     3




     layer
                                         Not Rated                                                                      3                                                 4
                                                                                                                                        3
                                         1
                                                                                                                                    3                                         4
                                         2                                                                                                               4
                                         3                                                                                          3                                 5
                                                                                                                                        4
                                         4
                                                                                                                                6
                                         5                                                                                                                    5               6           6




     Revised
                                         6                                                                                          5                         6


                                        7                                                                                  6           5
                                                                                                                                                                                          7       10
                                         8                                                                                                  6



     annually
                                         9                                                                                              8
                                                                                                                                                              7
                                                                                                                                                                                              9
                                         10
                                                                                                                                                              7
                                         11                                                                                                     7                             8
                                         12                                                                                                                   8
                                         13
                                                                                                                                                         11
                                         14


     Changes
                                                                                                                                                    10                11
                                         15

                                        16
                                         17


     tempered
                                         18
                                         19
                                         20
                                         21
                                         22
                                         23




                   j:\fhcf\2002\ratemaking\maps\2002prelim temp2.wor (layout1)                                                                          Paragon Reinsurance Risk
                   3/02             17                                                                                                                  Management Services, Inc.
FHCF Ratemaking
References

                Florida Hurricane Catastrophe Fund
              2002 Ratemaking Formula Report to the
               Florida State Board of Administration
                          March 28, 2002
               Available through the FHCF website:
                  http://www.fsba.state.fl.us/fhcf/


    (Look for meeting materials from the 28 March 2002 Advisory
           Council meeting, amended to final mitigation levels)




                                  18
FHCF Ratemaking
Speaker Notes


      Paul E. Budde, Ph.D., ACAS, MAAA
      Senior Vice President
      Benfield Blanch
      3600 W 80th St
      Minneapolis, MN 55431
      Paul.budde@benfieldgroup.com




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