Industry Reserve Adequacy 1998 CLRS, Philadelphia Todd Hess, FCAS, MAAA Underwriters Reinsurance Company

Using Price Monitoring in Reserving n LR method: Use indicated loss ratio or relativity from earlier years n Bornhuetter Ferguson method: Use as initial loss ratios n Cape Cod (Stanard-Bühlman): Adjust premium via relativities n All methods: Reasonableness check

Bornhuetter-Ferguson IBNR = EP x ILR x % Unreported Cape Cod IBNR i = AEP i x ILR x % Unreported i ILR = Known Incurred  Avg. % Reported Avg. % Rpt’d = (  AEP i x % Rpt’d i )/(  AEP i ) AEP = EP adjusted for rate relativities, ie. through price monitoring

A Few Price Monitoring Approaches n Reinsurance –LR estimate on each piece of business written (Treaty reinsurance) –Average Att Point/Retention changes vs. average premium (Fac Certificate Reinsurance - many weaknesses) –Benchmark pricing relativity changes –Rate changes through underwriting audits

A Few Price Monitoring Approaches n Insurance –Percentage of proposed rate changes approved (admitted insurance) –Change in average rate derivations (schedule rating) –Change in average Basic Charges and insurance charges (experience rating)

Two More Topics n On-level factors vs. price monitoring n Reinsurance Effects –Traditional –Stop Loss

Loss Ratios Net of Reinsurance n Can look too low if buying cheap reinsurance/too high with expensive reinsurance n Premium Adjustment features can magnify net loss ratio swings n Look at retention changes/history of reinsurance rates n Net, Ceded, and Gross reserves can be affected in different ways to various pressures

Stop-Loss Reinsurance n Reserves difficult to evaluate when protected by Stop Loss Reinsurance n Reinsurers big purchasers n Structure can have wide ranging accounting treatments for both reinsurer and cedent –in the money lowers LR -- not inadequate, still protection –ceded reserve often offshore where discounting allowed –AP features can distort LRs