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Pricing Excess and Surplus Lines

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					Pricing Excess and Surplus Lines
              (COM-5)


       Ronald J. Herrig, FCAS
        Markel Corporation
         Deerfield, Illinois
What Is
the
Surplus
Lines
Market?
 The role of the Surplus Lines
industry is to provide a market
for hard-to-place risks that are
  not written by the standard
             market.
 Why are these risks not written
   by the standard market?
1. Distressed
   Risks/Markets

2. Unique Risks

3. High-Capacity Risks
    Examples of Distressed Risks
•   Newly Incorporated Manufacturer
•   Newly Practicing Physician
•   Physician with a History of Drug-Use
•   Lawyer with Past Disciplinary Problems
Examples of Distressed Markets

               • OB/GYNs

               • California Contractors

               • Nutritional
                 Supplements
Examples of Unique Risks
            • Architectural Project
              Policies

            • Fireworks Accounts

            • Shamu Transportation
    Examples of High-Capacity
              Risks
• High Rise Buildings

• Directors & Officers

• Aviation
  Property/Liability
How Can Surplus Lines
 Companies write this
       Junk?
By being Fast, Fluid and
       Flexible!
                  Regulation
• Needn’t file
  rates/forms

• Insurance company
  licensed in state of
  domicile only

• Many Responsibilities
  passed to the Surplus
  Lines Broker
       Coverage Limitations
• Claims-Made Coverage

• ALAE included within Limits

• Sublimits

• Custom Endorsements/Exclusions
Responsibilities Handled by
         Broker
              • Verify Diligent Search
                Completed

              • Maintain Policy Files
                for Audit

              • Collect and Remit
                Premium Tax
And more importantly…
            Expert Underwriting
U/Wers need:
• to understand their
  company’s appetite for
  risk – and abide by it
• knowledge of book’s
  underlying statistics
• to understand each insured
  and it’s associated risks

Art, science, experience
      Expert Claims Handling
• Smart Claim Handlers

• Standardized
  Approach to Claims
  Reserving

• Consistent Approach
  to Claims Reserving
Effects of the Market on E&S
          Hard Market and E&S
1.   Admitted Companies non-renew any
     iffy risks.

2.   Surplus Lines Apps increase
     dramatically.

3.   S.L. Rates Firm, Coverages Contract.

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




300

250

200                                                  2000
                                                     2001
150
                                                     2002
100                                                  2003
                                                     2004
 50

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

          2.   Fewer Risks are
               Declined.

          3.   E&S companies develop
               new products to
               maintain volume.
    Life Cycle of New Product
1. Coverage unavailable in Standard Market.
2. E&S develops coverage, forms,
   exclusions, rates.
3. Rates, Forms change quickly, as needed.
4. Rates, Forms Stabilize – Profit Grows
5. Standard Market offers broader product at
   lower rates.
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
       Pure Premium Method
               Treatment of Losses

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 Comparative 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!

• Intuition!

• Internet!
              Useful Sites
• www.google.com
• 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
•   www.espn.com
•   www.imdb.com

				
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posted:8/21/2011
language:English
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