Pricing Excess and Surplus Lines (COM-4) by owc12988

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									Pricing Excess and Surplus Lines
              (COM-4)


       Ronald J. Herrig, FCAS
        Markel Corporation
         Deerfield, Illinois
What Is
the
Surplus
Lines
Industry?
 The Surplus Lines industry
provides a market for hard-to-
place risks; risks the standard
 market chooses not to write.
    Why are these risks not written
      by the standard market?
•   Distressed
    Risks/Markets

•   Unique Risks

•   High-Capacity Risks
Distressed Risks – Something about the risk itself
        that makes it undesirable to the standard market.


• Start-Up Manufacturer – No track record
• New Physician
• Physician with a History of Drug-Abuse
 Distressed Markets – Something about the
entire category of risks that makes it undesirable to the standard market.




                                      • OB/GYNs - SOL

                                      • Junk Yards

                                      • Nutritional
                                        Supplements – What’s the
                                          new Ephedra?
Unique Risks – Characteristics of the
  risk make it too unusual to fall
   within standard U/W classes.
                   • Fireworks Accounts

                   • Shamu Transportation

                   • Architectural Projects
High-Capacity Risks – Risks needing high
      limits of protection and in-depth underwriting

• High Rise Buildings

• Directors & Officers

• Aviation
  Property/Liability
 How Can Surplus Lines
Companies write this Junk
     (Profitably)?
By being Fast, Fluid and
       Flexible!
                    Regulation
• No need to file
  rates/forms

• Licensing required
  only in state of
  domicile

• Not an unregulated
  industry, though
    Regulations That Do Apply
• Annual Statements

• Triennial Reviews

• Market Conduct Exams

• Risk-Based Capital Requirements

• SEC Requirements
         Adaptable Policies
• Claims-Made Coverage

• ALAE included within Limits

• Sublimits

• Customized Endorsements
And most importantly…
         Expert Underwriting
Underwriters need:
• to understand their
  company’s appetite for
  risk – and abide by it
• knowledge of book’s
  underlying statistics
• to understand each
  insured and its
  associated risks
           Claims Handling
• Knowledgeable Claim
  Handlers

• Standardized
  Approach to Claims
  Reserving

• Consistent Approach
  to Claims Reserving
Effects of the Market Cycle
         Hard Market and E&S
•   Admitted Companies become more
    selective.

•   Surplus Lines applications increase
    dramatically.

•   Rates Firm, Coverages Contract.

•   Small Decrease in Admitted Market
    can increase Non-Admitted Market
    Substantially.
      Change in Applications
                    (2000 Baseline = 100 units)




350

300

250
                                                   2000
200                                                2001
150                                                2002
                                                   2003
100                                                2004
 50

 0
         Products                        Med Mal
Soft Market and E&S
          •   Admitted Companies
              become less selective in
              their Underwriting.

          •   Fewer Risks are
              Declined.

          •   E&S companies develop
              new products to
              maintain volume.
Examples of New Products
            • Employment Practices
              Liability

            • Tenant Discrimination

            • Environmental
              Impairment Liability
                             EPLI
                       (1994 Baseline = 100 units)



45000
40000
35000
30000
25000
20000                                                          E.P. (000)
15000
10000
 5000
   0
        1994   1996   1998        2000           2002   2004
New Product Development
            1. Opportunity
               identification
            2. Product design
            3. Testing
            4. Product introduction
            5. Life-cycle
               management
     Opportunity Identification
• Broker
  Recommendations

• Marketing

• New Product Teams

• Media
Product Design
       • Target Market

       • Coverages

       • Policy Wording

       • Rating
Testing
    • Beta-Test on Select
      Market

    • Honest Feedback

    • Rate, rate, rate
Ratemaking Methods
        Ratemaking Methods
         for New Products

•   Pure Premium Methods

•   Piggy-back Method

•   Festus Method
      Pure Premium Methods

1. Ultimate Losses / Ultimate Exposures

2. Frequency x Severity
      Pure Premium Methods
1. Trend individual ‘ground-up’ losses;
   remove base deductible

2. Develop losses; cap at basic limit

3. Aggregate all adjusted losses.
       Pure Premium Method
              Treatment of Exposures

1. Multiply individual units of exposure by
   applicable relativity factors (state, class
   code, claims-made step-rate, etc.)

2. Aggregate all adjusted exposures
       Pure Premium Method
              Calculation of Rate

Pure Premium =
       Aggregate Adjusted Losses
     Aggregate Adjusted Exposures

Base Rate = Pure Premium
            Permissible L/R
       Pure Premium Method
• Works well for an existing product
• Works best for a product with a well-
  defined exposure base (doctors, employees)
• Requires detailed loss and exposure info
  (claim-by-claim, policy-by-policy)
• Actuarially sound
          Piggy-back Method
1. Start with Comparable Product
2. Adjust Rates for Coverage
   differences
3. Adjust for Limits/Deductible
   differences
4. Adjust for Expense differences
5. Others?
        Piggy-back Method
• Works well for Enhancement of Existing
  Product
• Requires knowledge of Comparable Product
• Judgmental
• Danger of being too
     Conservative/Aggressive?
• Difficult to Support to Others
The Festus Method
The Festus Method
               Ratemaking Tools
• Imagination!

• Innovation!

• Intuition!

• Internet!
              Useful Sites
• www.google.com – Big Brother is
  Watching!
• www.firstgov.gov - U.S. Government’s
  Official Web Portal
• www.bls.gov - Bureau of Labor Statistics
• www.federalreserve.gov - Interest Rates
      Other Useful Websites
• www.cas.org
• www.cnn.com
• Where ever else the web may take you!

								
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