2000 CAS RATEMAKING SEMINAR INCORPORATING CATASTROPHE MODELS IN PROPERTY RATEMAKING (PROP - 8) BETH FITZGERALD, FCAS, MAAA

HURRICANE MODEL IN RATEMAKING Why a Hurricane Model? Hurricane Modeling Use of Model Output in Homeowners Ratemaking Revisions of Model Future Plans

TRADITIONAL EXCESS PROCEDURE Based on historical insurance experience Split historical losses into normal vs. excess Calculate expected excess losses Use historical average Use many years Use regional data As a percentage of normal losses Replace actual catastrophe losses with long term average

LIMITATIONS OF TRADITIONAL PROCEDURE Experience period too short Changes in conditions Difficulty in allocating to territory

GROWTH IN POPULATION DENSITY PEOPLE PER SQUARE MILE

HURRICANES VS. TORNADOES Tornadoes More Frequent Tornadoes Individually Generate Lower Losses Than Intense Hurricanes

ADVANTAGES OF A HURRICANE MODEL MODEL LINKS: 100+ years of meteorological data damageability information by construction type current distribution of insured exposure to risk

MODELING BASICS Simulate type & nature of hurricane Estimate wind speeds from simulated hurricanes Estimate the damage caused by those winds

HURRICANE MODEL For each simulated hurricane: Establishes probability of occurrence Establishes storm path Determines wind speed at a site Determines damageability ratios Calculates expected damageability ratios by zip code for all simulated storms

REVIEW OF MODEL Comparison of modeled and actual frequencies Compliance with standards of Florida Commission on Hurricane Loss Projection Methodology

MODEL OUTPUT Mean Damageability Ratios (MDR’s) by: zip code building / contents / ALE coverage construction type single vs. multi-family homes

AGGREGATION OF ZIP MDR’s NEED: Mapping of zip to ISO territory definitions HAVE: Database with insured house values by zip and territory TERRITORY MDR’s: Calculate weighted average of MDR’s for individual zips comprising territory For zip in multiple territories, allocate insured house values among territories

SAMPLE OF HURRICANE MODEL OUTPUT

SAMPLE CALCULATION OF WEIGHTED MDR

DEDUCTIBLE ADJUSTMENT Model - percent deductible Convert $250 to percent deductible Model - adjusted MDR’s reflecting percent deductible

CALCULATION OF HURRICANE LOSSES MDR’s by Construction Type within Territory Hurricane Losses = MDR x Amount of Insurance by Construction Type Territory Hurricane Losses = Sum over Construction Types Statewide Hurricane Losses = Sum over Territories

REMOVAL OF HURRICANE LOSSES Meteorological history storm tracks, 6-hour wind speeds Reported wind losses available Manually remove hurricane losses

ADJUSTMENTS TO REPORTED LOSSES For each of latest 5 Accident Years: REMOVE REPORTED HURRICANE LOSSES $250 Deductible Excess (Non-Hurricane) Wind Procedure LAE Factor Current Cost/Amount Factor Projection Factor Base Class Level

STATEWIDE LOSS COST EXAMPLE

STATEWIDE LOSS COST EXAMPLE

CALCULATION OF HURRICANE LOSS COST Statewide Hurricane Loss Costs from model Apply Latest Year Current Cost/Amount Factor Apply Projection Factor Apply LAE Factor Adjust to Base Class - Latest Year C & C Factor

STATEWIDE LOSS COST EXAMPLE Calculation of Hurricane Loss Cost

STATEWIDE LOSS COST EXAMPLE Indicated Loss Cost Change

TERRITORY LOSS COST CHANGES Distribute statewide change to each territory Compare combined non-modeled & modeled experience by territory to statewide experience Adjust non-modeled loss cost to current year level

TERRITORY LOSS COST EXAMPLE

TERRITORY LOSS COST EXAMPLE * Statewide Loss Cost Change = +9.3%

REVISIONS OF MODEL Impact on Pending Filings Education on Detail of Revisions Evaluation of Revised Output for Reasonableness

FUTURE PLANS Territory Definitions Separate Hurricane Rating

SEPARATE HURRICANE RATING Current Homeowners Rating Procedure: All-peril base loss cost by territory Relativities - protection/construction, deductible, policy form, policy size

SEPARATE HURRICANE RATING REASONS Traditional class relativities not related to hurricane peril: protection, policy form New class factors for hurricane peril: type of roof, shutter protection, number of stories Model allows for more refined territories

SEPARATE HURRICANE RATING Difficulties: Added complexity & major system changes New class factors for hurricane peril may not be easily available

RESEARCH TO DATE Rating Factors for Hurricane Loss Cost: Eliminate protection relativities Use model construction relativities vs. all-peril relativities Use same (all-peril) policy size relativities Investigate secondary building characteristics available from model

SEPARATE HURRICANE RATING Only consider in high hurricane prone areas - Southeast states & coastal areas Need to redefine territories in some states to be consistent with hurricane exposure concurrent with territory review of state