1. 1999 1999 Casualty Loss Reserve Casualty Loss Reserve Seminar Seminar DD&R/Extended Reserves Presented by Christopher P. Walker, FCAS, MAAA PricewaterhouseCoopers LLP September 13, 1999

2. CLRS Seminar - DD&R Extending Reporting Endorsement Extending Reporting Endorsement u Separate policy u Bridges gap between prior claims-made coverage and occurrence coverage u Late reported claims applied to endorsement, not prior coverage u A separate premium is usually charged Slide 1

3. CLRS Seminar - DD&R DD&R Coverage DD&R Coverage u Death of insured u Disability of insured u Retirement of insured, sometimes subject to tenure criteria Slide 2

4. CLRS Seminar - DD&R NAIC Concerns NAIC Concerns uThe expected cost of promised DD&R was not always recognized on insurers’ balance sheets uSeparate charge not made for DD&R benefit Slide 3

5. CLRS Seminar - DD&R NAIC Guidelines NAIC Guidelines uMake a charge in current rates to reflect future DD&R uUnearned premium reserve, or loss reserve, should be established to recognize future DD&R benefit Slide 4

6. CLRS Seminar - DD&R NAIC Guidelines (cont.) NAIC Guidelines (cont.) Insurers should establish a “level premium” charge to Insurers should establish a “level premium” charge to remain a constant percent of premium whether an insurer: remain a constant percent of premium whether an insurer: u Is just starting to write business u Has provided coverage for several years and continues to write new business u Has ceased writing new business but continues to write existing accounts Slide 5

7. CLRS Seminar - DD&R NAIC Guidelines (cont.) NAIC Guidelines (cont.) 1999 Actuarial Opinion 1999 Actuarial Opinion u Must additionally opine on extended loss and expense reserve u Located on the Schedule P Interrogatories Slide 6

8. CLRS Seminar - DD&R Model Inputs Model Inputs u Loss trend u Time value of money u Lapse rates u Mortality of population u Morbidity of population u Age of the insured when first insured with company u Relationship of tail cost to mature claims-made rate Slide 7

9. CLRS Seminar - DD&R Other NAIC Recommended Factors Other NAIC Recommended Factors u Age and tenure requirements u Age and tenure demographics u Pricing differentials related to age u Expected claims costs related to age and years to retirement u Waivers u Partial benefits Slide 8

10. CLRS Seminar - DD&R “Pay As You Go” “Pay As You Go” u No liability exists for DD&R until the contract is issued u Need to establish premium load reflecting endorsements issued in upcoming policy period only u Uses mortality/morbidity/retirement considerations u Compares PV of DD&R cost for the policy period compared to anticipated non-DD&R premium Slide 9

11. CLRS Seminar - DD&R “Level Funding” Approach “Level Funding” Approach u Liability is accrued for DD&R throughout insured’s anticipated tenure with company u A charge, as percent of premium, is charged for each insured based on age first insured with insurance company u Premium load remains constant throughout tenure with company u Very sensitive to trend and interest rate assumptions u Unearned premium reserve is a direct result of pricing calculation Slide 10

12. CLRS Seminar - DD&R References References uDeath, Disability, and Retirement Coverage: Pricing the “Free” Claims-Made Tail by Christopher Walker and Don Skrodenis, located in the Casualty Actuarial Society Forum, Winter 1996 uA Dynamic Approach to Modeling Free Tail Coverage by Robert Walling III, located in the Casualty Actuarial Society Forum, Fall 1999 Slide 11