ab European vs US Pricing Approaches Several Comparisons European vs US Pricing Approaches Several Comparisons CARe I. Mashitz

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 2 European vs US Pricing Approaches Several Comparisons European Questions on the Reliability of ISO/NCCI Data for Reinsurers Alternative Trend Procedure European ILF Method European Critique: Free Cover Issue

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 3 European vs US Pricing Approaches Several Comparisons European Questions on the Reliability of ISO/NCCI Data for Reinsurers

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 4 Applicability of ISO/NCCI Data for Reinsurance Layers Focus on primary layers Lack of Data in Umbrella layers Assumption of uniform loss trend by SOL Functional form of the Mixed Exponential

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 5 Data Anomalies in ISO/NCCI Data Indemnity trend higher than medical trend Unexplained large trend movements one year to next Unexplained large movement in layer loss cost one year to next

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 6 European vs US Pricing Approaches Several Comparisons Alternative Trend Procedures

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 7 Alternative Trend Procedure Definition of Methodology Define a small set of severe bodily injury claims that normally pierce a reinsurance layer Specify age of claimant, marital status, number of children, salary, etc. Specify other claim characteristics Evaluate these claims each year

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 8 Alternative Trend Procedure Illustrative List of Claims Permanent Partial Quadriplegic Fatality

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 9 Alternative Trend Procedure Advantages Only reinsurance layer claims considered Drivers of loss trends well understood Severity trend not affected by frequency trend Applicable in absence of bureau information Allows for jurisdictional differences

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 10 Alternative Trend Procedure Disadvantages Somewhat dependent on subjective judgment Relies heavily on expertise of practitioners Small and incomplete sample Severity trend model only

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 11 European vs US Pricing Approaches Several Comparisons European ILF Method

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 12 European ILF Method Definition 1 + ILF represents the constant ratio of expected loss as you double the limit

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 13 European ILF Method Example ILF =.30 Assume first million ground up Expected loss = $1,000,000 The 1 XS 1 layer EL =.30 X $1,000,000 = $300,000 The 2 XS 2 layer EL =.30 X $1,300,000 = $390,000 The 4 XS 4 layer EL =.30 X $1,690,000 + $507,000

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 14 European ILF Method Comparison The European assumption is more severe than the US ISO curves and is equivalent to a single parameter pareto with alpha less than 1. alpha = 1 – LN(1+ILF)/LN(2) ILFalpha

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 15 European ILF Method Application The Underwriter will choose from a range of ILFs based on his/her experience and exposure assessment of the severity of risk insured

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 16 European vs US Pricing Approaches Several Comparisons European Critique: Free Cover Issue Two Issues

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 17 European Critique: Free Cover Issue Two Issues A. Unexposed cover – i.e., limit larger than largest loss B. Unobserved losses – i.e., coverage for which no losses yet exist

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 18 European Critique: Free Cover Issue Simple Method Add “x” points “x” selected based on underwriter’s assessment of exposure

ab European vs US Pricing Approaches Several Comparisons CARe I. Mashitz Slide 19 European Critique: Free Cover Issue “Slightly” sophisticated approach – issue “A” Develop a limited mean loss ratio Use a severity distribution to build to unlimited loss ratio Select a CV and form of aggregate distribution