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Price and Rate Monitoring CSAF Meeting, Des Moines, IA September 28, 2012 Presented by Anthony Hill, Swiss and Young Kim, Zurich General Insurance Underwriting.

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Presentation on theme: "Price and Rate Monitoring CSAF Meeting, Des Moines, IA September 28, 2012 Presented by Anthony Hill, Swiss and Young Kim, Zurich General Insurance Underwriting."— Presentation transcript:

1 Price and Rate Monitoring CSAF Meeting, Des Moines, IA September 28, 2012 Presented by Anthony Hill, Swiss and Young Kim, Zurich General Insurance Underwriting

2 2 Table of Contents / Agenda Price/Rate Monitoring Introduction Various Approaches to Price/Rate Monitoring Price/Rate (Adequacy) Change Example Comparison of Results Backward/Forward Walks Decisions & Challenges in Price/Rate Monitoring Conclusions Zurich's Approach to Rate Monitoring

3 Price/Rate Monitoring Introduction 3

4 4 Price/Rate Monitoring – What is it? Simple definition: a measurement of the change in rate levels from one period to another – what the customer typically feels. A more complex definition: a measurement of the change in effective rate levels from one period to another (reflecting mix shift) – how our rate adequacy changes over time. Absolute rate level or rate adequacy is not critical. It's the change in rates or rate levels that we're concerned with.

5 5 Price/Rate Monitoring – Purpose & Uses Track changes in rate levels over time Allows for the projection of historical loss ratios to a future period for profitability and forecasting purposes Allows backward walk of current costing loss ratios to see if they are consistent with historical results (Pricing-Reserving Linkage) Facilitate analysis of strengthening and erosion in loss picks Facilitates planning, providing granularity into the source of historical premium changes (e.g. exposure, growth, rate) Critical part of portfolio steering; particularly powerful when combined with hit rates, retention rates, and industry price monitors Useful tool in driving underwriter behavior and providing timely feedback

6 Various Approaches to Price/Rate Monitoring 6

7 Three basic approaches to price/rate monitoring Method 1: Change in standard rates or benchmarks plus the impact of changes in certain credits and debits Method 2: Change in price per exposure – portfolio and matched renewals Method 3: Change in price relative to benchmark Price/Rate Monitoring Approaches

8 Method 1: Changes in Standard/Filed Rates with Selected Credits/Debits Description: Applicable Segments: Policy/Portfolio Metrics: Advantages: Disadvantages: Usually applied at portfolio level For portfolio, impact of changes to each rating variable are calculated independently. More complex policy-level calculations that consider interactions of rating variables are possible with appropriate systems. The most robust method allows for re-rating past policies with current rating plan. US Admitted and other segments where rates are filed and/or highly structured Works best on stable portfolios with high renewal retention ratios Requires a fixed pricing structure Normally a renewal pricing metric; (Change in) price adequacy is not directly calculated. Does not typically reflect the impact of new/lost business. For portfolio calculations, historical rate changes usually reflect exposure at time rates were filed. They may not be accurate for the current portfolio. Determining how to handle changes in debits/credits can be problematic. This is particularly true for experience rating, which is intended to be predictive of loss potential. The problem comes when adding a year of experience on a renewal (and typically dropping an old year) produces significantly different credits/debits without a change in underlying exposure. Widely recognized and accepted by external regulators and rating agencies Filed rate change impacts are readily available for admitted business as part of rate filings All but judgemental credits/debits are known at time rates are committed to (filed). Price change is calculated as a combination of changes in standard/filed rates plus changes in certain credits and debits. Credits/debits that change due to movements in the underlying exposure to loss (e.g. credits for adding sprinklers) are usually excluded from the calculation.

9 Method 2a: Changes in Price per Exposure - Portfolio Calculation Description: Applicable Segments: Policy/Portfolio Metrics: Advantages: Disadvantages: The metric is calculated at the portfolio level. The calculation can be driven down to the policy level, but is so crude that it will only be credible for matched renewals. Works best on stable portfolios with relatively homogeneous exposures. Stratification can be used to expand applicability to large portfolios having heterogeneous exposures. Requires a single exposure metric for all policies. Often this can mean that the exposure metric is highly simplified (e.g. policy count or limits sold). There may be significantly different values of the same metric if multiple exposure bases are available and used – with little guidance on which is most accurate. Extremely crude price metric. It can be misleading under a wide variety of scenarios. Examples include: Writing or cancelling a single large policy A significant change in layers written Mix shifts between classes Easily understood and easily calculated. Includes impact of new and lost business. As a simple metric, it is readily available and can be a good leading indicator of price changes that are calculated more accurately. Price change is calculated as the change in premium per exposure for the full portfolio. Exposure can be defined in a variety of ways, but must be available for all policies.

10 Method 2b: Changes in Price per Exposure - Matched Renewals Description: Applicable Segments: Policy/Portfolio Metrics: Advantages: Disadvantages: Policies having significant changes in exposure, limits, or deductibles/SIR's are typically excluded. Portfolio metrics can be calculated as a weighted average of individual policy changes, where price changes are normally weighted by expiring premium. Works best on stable portfolios with relatively homogeneous exposures. Stratification can be used to expand applicability to large portfolios having heterogeneous exposures. Purely a renewal pricing metric; (Change in) price adequacy is not directly calculated. Does not directly reflect the impact of new/lost business. However there are some techniques for incorporating the impact of new/lost business. If portfolio is changing significantly, the metric may be based on a relatively small sample of policies (renewals with only minimal exposure/limit/deductible changes). This sample may be highly skewed, particularly if portfolio shifts are driven by re-underwriting efforts. Easily understood and easily calculated. Most closely matches price changes felt by customers. Impact can be attributed to individual policies. Price change is calculated as the change in premium per exposure for each renewing policy. Exposure can be defined in a variety of ways, but is most often the exposure base used to price or cost the policy (e.g. sales or turnover).

11 Method 3: Changes in Price relative to Benchmark Description: Applicable Segments: Policy/Portfolio Metrics: Advantages: Disadvantages: Calculated for each transaction and summed to produce portfolio metrics. Can apply across a broad variety of portfolios as long as a benchmark price or loss cost exists (and has existed historically). Requires sophisticated costing systems in order to re-price historical policies with current benchmarks. Does not directly measure price change felt by customers. Assumes all benchmark prices or loss costs are equally adequate, which is often not the case. When benchmarks change, the historical price adequacy index should be restated, which can be extremely difficult if rating variables have changed over time. The restatement of the historical price adequacy can produce significant revisions over the full history of the segment – something that may be challenging to explain and manage. If experience rating is a significant part of costing, it can be difficult to properly incorporate its impact. Often it is excluded. Measures (Re)insurer's current view of historical changes in price adequacy. The most robust and accurate method available. Can be used with either loss costs (e.g. raw benchmarks) or fully loaded indicated costs. Applied regardless of new business or renewal business. Can be calculated at time of quoting/binding. Actual premium is divided by benchmark premium (or loss cost) to produce a price adequacy index. Effective Price change (measuring change in price adequacy) is calculated as the change in this price adequacy index over time.

12 12 Price Monitoring – A.M. Best View – A.M. Best requires separate price monitoring on New and Renewal business in its Supplemental Rating Questionnaire (SRQ). – Four year history – For each annual statement line – Uses Method 1: Change in filed rates plus credits/debits – Adds adjustments for New Busines Renewal Business New Business Direct Premium Written (DPW) on New Policies Number of New Policies Average Rate Modification due to Schedule Credits/Debits Average Rate Modification due to Other Pricing Adjustments New Policies Price Level Relative to Renewal Price Level Direct Premium Written (DPW) on Renewed Policies Number of Policies Renewed Average Change in DPW due to Filed Rate Changes Average Rate Modification due to Schedule Credits/Debits Average Rate Modification due to Other Pricing Adjustments Total Average Change in Pricing Price Level Indexed to Initial Year Material Changes in T&C and whether impact is included in pricing changes

13 Price/Rate (Adequacy) Change Example 13

14 14 Basic Information PRICE MONITORING EXAMPLE: 8 POLICIES PolicyStatusTypeShareLimitDeductible Share-Adjusted Exposure Loss Free As-Priced Benchmark Experience Cr/Db Schedule Cr/Db Charged Premium Current Benchmark Policy 1ExpiringPrimary100% $ 1,000,000 $ - $ 400,000 Yes $ 2,538 $ (254) $ 216 $ 2,500 $ 2,665 New/RenewPrimary100% $ 1,000,000 $ - $ 440,000 Yes $ 2,931 $ (293) $ 62 $ 2,700 $ 2,931 Policy 2ExpiringPrimary100% $ 5,000,000 $ - $ 50,000,000 No $ 34,650 $ 5,198 $ 153 $ 40,000 $ 36,383 New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 Yes $ 37,838 $ (3,784) $ 10,946 $ 45,000 $ 37,838 Policy 3ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 400,000,000 Yes $ 168,437 $ (8,422) $ (10,015) $ 150,000 $ 194,545 New/RenewExcess100% $ 8,000,000 $ 2,000,000 $ 380,000,000 Yes $ 184,818 $ (9,241) $ (55,577) $ 120,000 $ 184,818 Policy 4ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 300,000,000 Yes $ 134,750 $ (6,737) $ (8,012) $ 120,000 $ 155,636 New/RenewExcess100% $ 5,000,000 $ 320,000,000 No $ 45,276 $ 11,319 $ (6,595) $ 50,000 $ 45,276 Policy 5ExpiringExcess100% $ 3,000,000 $ 2,000,000 $ 300,000,000 Yes $ 98,000 $ (4,900) $ (23,100) $ 70,000 $ 113,190 New/Renew Policy 6ExpiringExcess100% $ 5,000,000 $ 300,000,000 Yes $ 36,750 $ (1,838) $ 15,088 $ 50,000 $ 42,446 New/RenewExcess100% $ 5,000,000 $ 320,000,000 Yes $ 45,276 $ (2,264) $ 6,988 $ 50,000 $ 45,276 Policy 7Expiring $ - New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 Yes $ 77,175 $ (7,718) $ 20,543 $ 90,000 $ 77,175 Policy 8ExpiringPrimary100% $ 5,000,000 $ - $ 52,000,000 No $ 73,500 $ 11,025 $ 5,475 $ 90,000 $ 77,175 New/RenewPrimary50% $ 5,000,000 $ - $ 26,000,000 Yes $ 38,588 $ (3,859) $ 10,271 $ 45,000 $ 38,588 TotalExpiring $ 1,402,400,000 $ 548,625 $ (5,928) $ (20,196) $ 522,500 $ 622,039 New/Renew $ 1,150,440,000 $ 431,901 $ (15,839) $ (13,362) $ 402,700 $ 431,901 Key Assumptions: Benchmark rates have increased 5% at Renewal; Rates on Excess/Deductible policies have increased an additional 10%. The Experience Rating Plan is unchanged: Primary: Loss-free receives 10% Credit; all others receive 15% Debit. Excess: Loss-free receives 5% Credit; all others receive 25% Debit. The Schedule rating plan is unchanged and based on underwriter discression. Exposures are inflating at 2% annually. Claim Frequency is trending at -1% annually. Claim Severity is trending at 3% for primary and 5% for excess. All premiums are net of acquisition costs.

15 Method 1: Changes in Standard/Filed Rates with Selected Credits/Debits 15

16 16 Method 1: Rate Change Breakdown Category Expiring Price/Rate Change New/Renew Price/Rate Change Base Rate / Benchmark Changes (+5%)5.0% Class Relativity Changes (NC)0.0% Territory Relativity Changes (NC)0.0% Increased Limit Factor Changes (+10% on Excess Policies)8.0%6.2% Change in Experience Rating Plan (NC)0.0% Change in Schedule Rating Plan (NC)0.0% Total Rate Change based on Expiring13.4%11.5%

17 17 Method 1: Change in Benchmark rates with credits and debits PolicyStatusTypeShareLimitDeductible Share-Adjusted Exposure As-Priced Benchmark Prior Benchmark Current Benchmark Benchmark Change Policy 1ExpiringPrimary100% $ 1,000,000 $ - $ 400,000 $ 2,538 $ 2,6655.0% New/RenewPrimary100% $ 1,000,000 $ - $ 440,000 $ 2,931 $ 2,792 $ 2,931 Policy 2ExpiringPrimary100% $ 5,000,000 $ - $ 50,000,000 $ 34,650 $ 36,3835.0% New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 37,838 $ 36,036 $ 37,838 Policy 3ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 400,000,000 $ 168,437 $ 194, % New/RenewExcess100% $ 8,000,000 $ 2,000,000 $ 380,000,000 $ 184,818 $ 160,015 $ 184,818 Policy 4ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 300,000,000 $ 134,750 $ 155, % New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 45,276 $ 39,200 $ 45,276 Policy 5ExpiringExcess100% $ 3,000,000 $ 2,000,000 $ 300,000,000 $ 98,000 $ 113, % New/Renew $ - Policy 6ExpiringExcess100% $ 5,000,000 $ 300,000,000 $ 36,750 $ 42, % New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 45,276 $ 39,200 $ 45,276 Policy 7Expiring $ - 5.0% New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 77,175 $ 73,500 $ 77,175 Policy 8ExpiringPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 73,500 $ 77,1755.0% New/RenewPrimary50% $ 5,000,000 $ - $ 26,000,000 $ 38,588 $ 36,750 $ 38,588 TotalExpiring $ 1,402,400,000 $ 548,625 $ 622, % New/Renew $ 1,150,440,000 $ 431,901 $ 387,493 $ 431, %

18 18 Method 1: Rate Adequacy Adjustments for Rates and Trend PRICE MONITORING EXAMPLE: 8 POLICIES PolicyStatusTypeShareLimitDeductible Share-Adjusted Exposure As-Priced Benchmark Current Benchmark Benchmark Change Exposure Trend Frequency Trend Severity Trend Policy 1ExpiringPrimary100% $ 1,000,000 $ - $ 400,000 $ 2,538 $ 2,6655.0%2.0%-1.0%3.0% New/RenewPrimary100% $ 1,000,000 $ - $ 440,000 $ 2,931 Policy 2ExpiringPrimary100% $ 5,000,000 $ - $ 50,000,000 $ 34,650 $ 36,3835.0%2.0%-1.0%3.0% New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 37,838 Policy 3ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 400,000,000 $ 168,437 $ 194, %2.0%-1.0%5.0% New/RenewExcess100% $ 8,000,000 $ 2,000,000 $ 380,000,000 $ 184,818 Policy 4ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 300,000,000 $ 134,750 $ 155, %2.0%-1.0%5.0% New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 45,276 Policy 5ExpiringExcess100% $ 3,000,000 $ 2,000,000 $ 300,000,000 $ 98,000 $ 113, %2.0%-1.0%5.0% New/Renew Policy 6ExpiringExcess100% $ 5,000,000 $ 300,000,000 $ 36,750 $ 42, %2.0%-1.0%5.0% New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 45,276 Policy 7Expiring $ - 5.0%2.0%-1.0%3.0% New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 77,175 Policy 8ExpiringPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 73,500 $ 77,1755.0%2.0%-1.0%3.0% New/RenewPrimary50% $ 5,000,000 $ - $ 26,000,000 $ 38,588 TotalExpiring $ 1,402,400,000 $ 548,625 $ 622, %2.0%-1.0%3.8% New/Renew $ 1,150,440,000 $ 431, %2.0%-1.0%4.1%

19 19 Method 1: Rate Adequacy Adjustments for Experience & Schedule Rating* PolicyStatusTypeShareLimitDeductible Share-Adjusted Exposure Loss Free As-Priced Benchmark Experience Cr/Db Schedule Cr/Db Charged Premium Policy 1ExpiringPrimary100% $ 1,000,000 $ - $ 400,000 Yes $ 2,538 $ (254) $ 216 $ 2,500 New/RenewPrimary100% $ 1,000,000 $ - $ 440,000 Yes $ 2,931 $ (293) $ 62 $ 2,700 Policy 2ExpiringPrimary100% $ 5,000,000 $ - $ 50,000,000 No $ 34,650 $ 5,198 $ 153 $ 40,000 New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 Yes $ 37,838 $ (3,784) $ 10,946 $ 45,000 Policy 3ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 400,000,000 Yes $ 168,437 $ (8,422) $ (10,015) $ 150,000 New/RenewExcess100% $ 8,000,000 $ 2,000,000 $ 380,000,000 Yes $ 184,818 $ (9,241) $ (55,577) $ 120,000 Policy 4ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 300,000,000 Yes $ 134,750 $ (6,737) $ (8,012) $ 120,000 New/RenewExcess100% $ 5,000,000 $ 320,000,000 No $ 45,276 $ 11,319 $ (6,595) $ 50,000 Policy 5ExpiringExcess100% $ 3,000,000 $ 2,000,000 $ 300,000,000 Yes $ 98,000 $ (4,900) $ (23,100) $ 70,000 New/Renew Policy 6ExpiringExcess100% $ 5,000,000 $ 300,000,000 Yes $ 36,750 $ (1,838) $ 15,088 $ 50,000 New/RenewExcess100% $ 5,000,000 $ 320,000,000 Yes $ 45,276 $ (2,264) $ 6,988 $ 50,000 Policy 7Expiring $ - New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 Yes $ 77,175 $ (7,718) $ 20,543 $ 90,000 Policy 8ExpiringPrimary100% $ 5,000,000 $ - $ 52,000,000 No $ 73,500 $ 11,025 $ 5,475 $ 90,000 New/RenewPrimary50% $ 5,000,000 $ - $ 26,000,000 Yes $ 38,588 $ (3,859) $ 10,271 $ 45,000 TotalExpiring $ 1,402,400,000 $ 548,625 $ (5,928) $ (20,196) $ 522,500 New/Renew $ 1,150,440,000 $ 431,901 $ (15,839) $ (13,362) $ 402,700 Expiring %-1.1%-3.7% Renewing %-3.7%-3.2% Change-2.6%0.5% *Technically should include only to the extent it does not change expected losses. However this is difficult to determine, particularly on an individual risk

20 20 Method 1: Change in Rate Adequacy Conversion to Price/Rate Adequacy Change Category Price/Rate Adequacy ChangeComments Total Price Change13.4%Based on Expiring Exposure Inflation (2.0%)2.0% Claims Frequency Trend (-1%)1.0% Claims Severity Trend (+3% Primary; +5% Excess)-3.6%Based on Expiring (1/ ) Change in Cr/Db due to experience* (improved experience)-2.6% Change in Cr/Db due to schedule rating* (+0.5%)0.5% Change in Mix due to UW, T&C, Layers, other-0.8%To reconcile with Method 3 Total Price/Rate Adequacy Change Excluding Mix Impacts10.2% Total Price/Rate Adequacy Change9.3%From Method 3 *Technically should include only to the extent it does not change expected losses. However this is difficult to determine, particularly on an individual risk.

21 21 Method 2: Changes in Price per Exposure - Portfolio & Matched Renewals

22 22 Method 2a: Portfolio Price per Exposure METHOD 2: CHANGE IN PRICE PER EXPOSURE - MATCHED RENEWALS & PORTFOLIO PolicyStatusTypeShareLimitDeductibleExposure*Premium Premium Divided by Exposure Policy 1ExpiringPrimary100% $ 1,000,000 $ - $ 400,000 $ 2, % New/RenewPrimary100% $ 1,000,000 $ - $ 440,000 $ 2, % Policy 2ExpiringPrimary100% $ 5,000,000 $ - $ 50,000,000 $ 40, % New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 45, % Policy 3ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 400,000,000 $ 150, % New/RenewExcess100% $ 8,000,000 $ 2,000,000 $ 380,000,000 $ 120, % Policy 4ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 300,000,000 $ 120, % New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 50, % Policy 5ExpiringExcess100% $ 3,000,000 $ 2,000,000 $ 300,000,000 $ 70, % New/Renew Policy 6ExpiringExcess100% $ 5,000,000 $ 300,000,000 $ 50, % New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 50, % Policy 7Expiring New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 90, % Policy 8ExpiringPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 90, % New/RenewPrimary50% $ 5,000,000 $ - $ 26,000,000 $ 45, % TOTALExpiring $ 1,402,400,000 $ 522, % New/Renew $ 1,150,440,000 $ 402, % Portfolio Price/Exposure Change-6.0%.035/.037-1

23 23 Method 2b: Matched Renewal Price per Exposure PolicyStatusTypeShareLimitDeductibleExposure*Premium Premium Divided by Exposure Matched Renewal? Renewal Rate Change Matched Expiring Premium Matched Exp. Premium X (1+Rate Ch.) Matched Ren. Premium / (1+Rate Ch.) Matched Renewing Premium Policy 1ExpiringPrimary100% $ 1,000,000 $ - $ 400,000 $ 2, % $ 2,500 $ 2,750 New/RenewPrimary100% $ 1,000,000 $ - $ 440,000 $ 2, %Yes-1.8% $ 2,455 $ 2,700 Policy 2ExpiringPrimary100% $ 5,000,000 $ - $ 50,000,000 $ 40, % $ 40,000 $ 41,600 New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 45, %Yes8.2% $ 43,269 $ 45,000 Policy 3ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 400,000,000 $ 150, % $ 150,000 $ 142,500 New/RenewExcess100% $ 8,000,000 $ 2,000,000 $ 380,000,000 $ 120, %Yes-15.8% $ 126,316 $ 120,000 Policy 4ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 300,000,000 $ 120, % $ - New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 50, %No-Limits $ - Policy 5ExpiringExcess100% $ 3,000,000 $ 2,000,000 $ 300,000,000 $ 70, % $ - New/RenewNo-Expired $ - Policy 6ExpiringExcess100% $ 5,000,000 $ 300,000,000 $ 50, % $ 50,000 $ 53,333 New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 50, %Yes-6.3% $ 46,875 $ 50,000 Policy 7Expiring $ - New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 90, %No-New $ - Policy 8ExpiringPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 90, % $ 90,000 $ 45,000 New/RenewPrimary50% $ 5,000,000 $ - $ 26,000,000 $ 45, %Yes0.0% $ 90,000 $ 45,000 TOTALExpiring $ 1,402,400,000 $ 522, % $ 332,500 $ 285,183 New/Renew $ 1,150,440,000 $ 402, % $ 308,915 $ 262,700 Matched Renewal Rate Change-7.1%-7.9% Expiring WgtsN/R Wgts 308,915/332, ,700/285,183-1

24 24 Method 2b: Rate Adequacy Adjustments for Trend PRICE MONITORING EXAMPLE: 8 POLICIES PolicyStatusTypeShareLimitDeductible Share-Adjusted Exposure As-Priced Benchmark Current Benchmark Exposure Trend Frequency Trend Severity Trend Policy 1ExpiringPrimary100% $ 1,000,000 $ - $ 400,000 $ 2,538 $ 2,6652.0%-1.0%3.0% New/RenewPrimary100% $ 1,000,000 $ - $ 440,000 $ 2,931 Policy 2ExpiringPrimary100% $ 5,000,000 $ - $ 50,000,000 $ 34,650 $ 36,3832.0%-1.0%3.0% New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 37,838 Policy 3ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 400,000,000 $ 168,437 $ 194,5452.0%-1.0%5.0% New/RenewExcess100% $ 8,000,000 $ 2,000,000 $ 380,000,000 $ 184,818 Policy 4ExpiringExcess100% $ 8,000,000 $ 2,000,000 $ 300,000,000 $ 134,750 $ 155,6362.0%-1.0%5.0% New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 45,276 Policy 5ExpiringExcess100% $ 3,000,000 $ 2,000,000 $ 300,000,000 $ 98,000 $ 113,1902.0%-1.0%5.0% New/Renew Policy 6ExpiringExcess100% $ 5,000,000 $ 300,000,000 $ 36,750 $ 42,4462.0%-1.0%5.0% New/RenewExcess100% $ 5,000,000 $ 320,000,000 $ 45,276 Policy 7Expiring $ - 2.0%-1.0%3.0% New/RenewPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 77,175 Policy 8ExpiringPrimary100% $ 5,000,000 $ - $ 52,000,000 $ 73,500 $ 77,1752.0%-1.0%3.0% New/RenewPrimary50% $ 5,000,000 $ - $ 26,000,000 $ 38,588 TotalExpiring $ 1,402,400,000 $ 548,625 $ 622,0392.0%-1.0%3.8% New/Renew $ 1,150,440,000 $ 431, %-1.0%4.1%

25 25 Method 2b: Change in Rate Adequacy Category Price/Rate Change Price/Rate Adequacy ChangeComments Matched Renewal Price/Rate Change (Wgtd Expiring)-7.1% Exposure Inflation (2.0%)2.0% Claims Frequency Trend (-1%)1.0% Claims Severity Trend (+3% Primary; +5% Excess)-3.6% Change in Acquisition Cost (Analysis is Net)0.0% Total on Matched Renewals excluding Mix-7.8%Subtotal Mix Shifts within renewals (exposure & share changes)-3.4%Backed into to Match Method 3 on MR Total on Matched Renewals-7.1%-10.9%Subtotal Policy 4 – Revised (improved) terms excluded from MR6.5%8x2 now 5x5 at better price adequacy Policy 5 – Lost (poorly priced) Business7.4%Expiring was 29% below benchmark Policy 7 – New (well priced) Business7.4%Price is 17% above benchmark Total All Policies-7.1%9.3%Reconciles to Method 3

26 26 Method 3: Changes in Price relative to Benchmark

27 27 Method 3: Change in Price Relative to Benchmark PolicyStatus Share-Adjusted Exposure As-Priced Benchmark Charged Premium Current Benchmark Net LR Trend Current Benchmark De-Trended Priced to Benchmark As-Priced Priced to Current Benchmark Priced to Current Benchmark De-Trended Price Adequacy Change Policy 1Expiring $ 400,000 $ 2,538 $ 2,500 $ 2,6650.0% $ 2, %93.8% New/Renew $ 440,000 $ 2,931 $ 2,700 $ 2, % -1.8% Policy 2Expiring $ 50,000,000 $ 34,650 $ 40,000 $ 36,3830.0% $ 36, %109.9% New/Renew $ 52,000,000 $ 37,838 $ 45,000 $ 37, % 8.2% Policy 3Expiring $ 400,000,000 $ 168,437 $150,000 $ 194,5451.9% $ 190, %77.1%78.6% New/Renew $ 380,000,000 $ 184,818 $120,000 $ 184, % -17.4% Policy 4Expiring $ 300,000,000 $ 134,750 $120,000 $ 155,6361.9% $ 152, %77.1%78.6% New/Renew $ 320,000,000 $ 45,276 $ 50,000 $ 45, % 40.5% Policy 5Expiring $ 300,000,000 $ 98,000 $ 70,000 $ 113,1901.9% $ 111, %61.8%63.0% New/Renew $ - Policy 6Expiring $ 300,000,000 $ 36,750 $ 50,000 $ 42,4461.9% $ 41, %117.8%120.0% New/Renew $ 320,000,000 $ 45,276 $ 50,000 $ 45, % -8.0% Policy 7Expiring0.0% $ - New/Renew $ 52,000,000 $ 77,175 $ 90,000 $ 77, % Policy 8Expiring $ 52,000,000 $ 73,500 $ 90,000 $ 77,1750.0% $ 77, %116.6% New/Renew $ 26,000,000 $ 38,588 $ 45,000 $ 38, % 0.0% TOTALExpiring $1,402,400,000 $ 548,625 $522,500 $ 622,0390.8% $ 612, %84.0%85.3% New/Renew $1,150,440,000 $ 431,901 $402,700 $ 431,9011.0% $ 431, % 9.3%

28 28 Method 3: Change in Price Relative to Benchmark LR Trend Calculation PolicyStatusType Charged Premium Exposure Trend Frequency Trend Severity Trend Net LR Trend Policy 1ExpiringPrimary $ 2,5002.0%-1.0%3.0%0.0% New/RenewPrimary $ 2,700 Policy 2ExpiringPrimary $ 40,0002.0%-1.0%3.0%0.0% New/RenewPrimary $ 45,000 Policy 3ExpiringExcess $150,0002.0%-1.0%5.0%1.9% New/RenewExcess $120,000 Policy 4ExpiringExcess $120,0002.0%-1.0%5.0%1.9% New/RenewExcess $ 50,000 Policy 5ExpiringExcess $ 70,0002.0%-1.0%5.0%1.9% New/Renew Policy 6ExpiringExcess $ 50,0002.0%-1.0%5.0%1.9% New/RenewExcess $ 50,000 Policy 7Expiring2.0%-1.0%3.0%0.0% New/RenewPrimary $ 90,000 Policy 8ExpiringPrimary $ 90,0002.0%-1.0%3.0%0.0% New/RenewPrimary $ 45,000 TOTALExpiring $522,5002.0%-1.0%3.8%0.8% New/Renew $402,7002.0%-1.0%4.1%1.0%

29 29 Comparison of Results

30 30 Price/Rate Change Metrics : Comparison of Results Method Price/Rate Change Simple* Price/Rate Adequacy Change Full Price/Rate Adequacy Change Method 1: Change in Standard/Filed Rates with Credits/Debits (Exp Wgt)13.4%10.2%9.3% Method 1: Change in Standard/Filed Rates with Credits/Debits (N/R Wgt)11.5%5.9%9.3% Method 2a: Change in Price per Exposure - Portfolio-6.0%9.3% Method 2b: Change in Price per Exposure - Matched Renewals (Exp Wgt)-7.1%-7.8%9.3% Method 2b: Change in Price per Exposure - Matched Renewals (N/R Wgt)-7.9%-8.9%9.3% Method 3: Change in Price Relative to Benchmark9.3% *Simple excludes mix impacts, which are typically difficult to quantify.

31 "Price Change" is difficult to define in a way that is universally appealing. "Price adequacy" may be a bit easier to define, but it is extremely difficult to measure accurately. Different Price/Rate Change methods can diverge if a portfolio has undergone significant change. Distortions in a price metric may be compounded when a series of price changes are linked in order to develop a price index. Many of the conclusions related to price adequacy are highly dependent on the assumptions related to trend and other factors. Be careful when benchmarking pricing with industry changes. The choice of metric (and what is included) can create significant differences. Some Observations

32 Zurich Rate Change Guidelines 32

33 Backward/Forward Walks 33

34 Backward/Forward Walks Backward walk restates the current pricing expected loss and restates it to the rate adequacy levels for each prior year. Forward walk restates historical ultimate loss ratios to the rate adequacy levels of the current year. Used to evaluate consistency of current loss ratio with historical experience Enhance understanding of portfolio volatility Critical feedback for both pricing/costing and reserving processes – Identify differences between expected and actual loss trends – Identify unmeasured price adequacy changes – Ensure consistency and accountability in pricing and reserving Slide 34

35 Backward/Forward Walks Slide 35 Price Adequacy ChangeExpected Loss RatioUltimate Reserving Loss Ratio InitialCurrent Price/RateOtherLoss RatioBookedBenchmark LRCurrentlyLevelLeveled YearChangeFactorsOverallAs PricedLRDetrended*BookedLR Factorto 2011 n(A)(B)(C)(D)(E)(F)(G)(H)(I) %70.8%79.5%78.3% % %-1.6%16.0%73.3%72.0%68.5%67.2% % %2.4%14.1%74.5%70.3%60.1%57.0% % %1.9%2.2%72.7%69.0%58.8%55.2% % %1.3%-3.1%71.3%68.1%60.7%59.9% % %-2.8%-8.6%70.4%70.1%66.4%66.9% % %-2.2%-7.7%72.5%71.7%72.0%72.7% % %-3.5%-7.1%74.1%74.2%77.5%74.5% % %-4.0%-7.2%76.8%77.3%83.5%80.2% % %0.1%4.4%80.0%77.3%80.0%77.3% % BackwardForward Walk nAccident Year (A)From Rate Monitor (B)From Rate Monitor – includes trend, debits/credits, mix changes (C)Overall Annual Price Adequacy Change: [1+(A)]x[1+(B)]-1 (D)Loss Ratio as Priced, assuming consistent target LR in rates: (D n+1 )x[1+(B n+1 )] (E)Loss Ratio initially booked by Reserving - may deviate from pricing (F)Current priced loss ratio backward walked to prior periods: (F n+1 )x[1+(C n+1 )] (G)Loss Ratio currently booked by reserving (H)Factor to adjust historical loss ratio to current price/cost levels: (H n+1 )/[1+(C n+1 )] (I)Reserving Booked LR adjusted to 2011 price and cost level: (G) x (H)

36 Decisions & Challenges in Price/Rate Monitoring 36

37 Key decisions when building price montioring Which method or combination of methods is appropriate for each business segment What should be included/excluded in the metric (may impact method selection) How to operationalize the metric Key Decisions and Challenges in the Design of a Price/Rate Monitoring System

38 Which method or combination of methods is appropriate for each business segment – Desire for Price/Rate change, Price/Rate Adequacy change, or both – Availability of data – Willingness to include subjective measures – Willingness to use multiple methods or a combination of methods – How to combine across segments that use different methods Key Decisions and Challenges in the Design of a Price/Rate Monitoring System

39 What should be included/excluded in the metric* – Incorporation of changes in underlying exposures (change in mix between business units, use of multiple exposure definitions) – Premium lift from exposure/coverage Inflation – Claims inflation (ground-up, excess, limited), benefit changes and frequency trend – Limit/ attachment/ deductible/ SIR changes – New and lost business impact (potentially reflecting adverse/favorable selection) – Experience rating impact – Underwriter modification impact – Commission changes; Gross versus Net price – Changes in coverage, terms and conditions – Retrospective adjustments (e.g. retrospectively rated premiums/commissions, premium audits) – Other factors (e.g. mix of business between rating tiers, changes in underwriting standards, or changes in investment yields) *may impact method selection Key Decisions and Challenges in the Design of a Price/Rate Monitoring System

40 How to operationalize the metric – System/Database Design – Need for additional work/coding when quoting/binding – Report Design, Diagnostics, Drill-Downs – Historization/Restatement – Downstream uses Key Decisions and Challenges in the Design of a Price/Rate Monitoring System

41 Conclusions 41

42 Final Thoughts (Re)insurance companies monitoring price changes face many challenges in the design and implementation of the metrics. Price and Price Adequacy change metrics, however calculated, will likely have some weaknesses in them. Still, price monitoring is a critical part of operating a (Re)insurance company. The more a portfolio changes, the more likely the price (adequacy) change metrics will be flawed. When in doubt, it's useful to have multiple price metrics. They may not tell you the "right" answer, but you can feel more confident if they are consistent in their result. Slide 42

43 Thank you

44 Legal notice ©2012 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivatives of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. Although all the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial and/or consequential loss relating to this presentation. 44


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