1. The Insured’s Perspective- Risk Retention as an Investment Decision
March CAS Ratemaking Seminar
Moderator: Robert F. Wolf, FCAS, MAAA – Mercer Oliver Wyman, Chicago
Mark Ames- Mercer Oliver Wyman, Detroit
Scott Sanderson- Marsh and McClennan Companies

2. Portfolio Analysis and the Efficient Frontier
Security 1
Security 2
Security 3
Security 4
Security 5
Security 6
Security 7
Security 8
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7 0% 5%
10%
15%
20%
25%
Risk
= 99th Percentile of Retained Loss + Fixed Premium, collateral, frictional costs
Return
= Savings on Guaranteed Cost/No Retained Risk Premiums,
Collateral and other Frictional Costs
Each green dot represents an alternative insurance structure
Each Green Dot Represents an alternative insurance structure E E H H A A C C D D G G B B F F

3. Portfolio Analysis and the Efficient Frontier Short Quiz
Security 1
Security 2
Security 3
Security 4
Security 5
Security 6
Security 7
Security 8
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7
Figure The Efficient Frontier and Preference Indifference (Utility) 0% 5%
10%
15%
20%
25%
Risk
= 99th Percentile of Retained Loss + Fixed Premium, collateral, frictional costs
Return
= Savings on Guaranteed Cost/No Retained Risk
Premiums, Collateral and other Frictional Costs A B C D
Short Quiz
1. Which is Better A or B?
1. Which is Better A or B? E H E H
2. Which is Better C or D?
2. Which is Better C or D? F F
3. Which is Better F or H?
3. Which is Better F or H?

4. Portfolio Analysis and the Efficient Frontier
Security 1
Security 2
Security 3
Security 4
Security 5
Security 6
Security 7
Security 8
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7 0% 5%
10%
15%
20%
25%
Risk
= 99th Percentile of Retained Loss + Fixed Premium, collateral, frictional costs
Return
= Savings on Guaranteed Cost/No Retained Risk Premiums,
Collateral and other Frictional Costs
Go West = Less Risk
Go North=
Less
premium/
risk
financing
costs
Answers
1. A
2. C
3. ?? Depends
Answers
1. A
2. C
3. ?? Depends

5. Portfolio Analysis and the Efficient Frontier
Security 1
Security 2
Security 3
Security 4
Security 5
Security 6
Security 7
Security 8
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7 0% 5%
10%
15%
20%
25%
Risk
= 99th Percentile of Retained Loss + Fixed Premium, collateral, frictional costs
Return
= Savings on Guaranteed Cost/No Retained Risk Premiums,
Collateral and other Frictional Costs
Efficient Frontier. Can't get any
better deals northwest of this
curve
Market isn’t giving you anything better than Green Curve E E F F

6. Portfolio Analysis and the Efficient Frontier
Security 1
Security 2
Security 3
Security 4
Security 5
Security 6
Security 7
Security 8
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7 0% 5%
10%
15%
20%
25%
Risk
= 99th Percentile of Retained Loss + Fixed Premium, collateral, frictional costs
Return
= Savings on Guaranteed Cost/No Retained Risk Premiums,
Collateral and other Frictional Costs
Company Risk/Return
Indifference Curve.
Deals Northwest are
better
Portfolio Analysis and the Efficient Frontier
Company Risk Indifference Curve E H E H A C D A C D B B F F

7. Portfolio Analysis and the Efficient Frontier
Security 1
Security 2
Security 3
Security 4
Security 5
Security 6
Security 7
Security 8
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7
Current Insurance Structure
Utility Curve 0% 5%
10%
15%
20%
25%
Risk
= 99th Percentile of Retained Loss + Fixed Premium, collatereral, frictional costs
Return
= Savings on Guaranteed Cost/No Retained Risk Premiums,
Collateral and other Frictional Costs
Portfolio Analysis and the Efficient Frontier
Corporate Strategy:
Go Northwest Constrained by the Market Going Southeast.

8. Portfolio Analysis and the Efficient Frontier
Security 1
Security 2
Security 3
Security 4
Security 5
Security 6
Security 7
Security 8
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7
Optimum
Portfolio
Utility Curve 0% 5%
10%
15%
20%
25%
Risk
= 99th Percentile of Retained Loss + Fixed Premium, collateral, frictional costs
Return
= Savings on Guaranteed Cost/No Retained Risk Premiums,
Collateral and other Frictional Costs
Go Northwest G
Portfolio Analysis and the Efficient Frontier
G is the best deal

9. Portfolio Analysis and the Efficient Frontier
Security 1
Security 2
Security 3
Security 4
Security 5
Security 6
Security 7
Security 8
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
Portfolio 6
Portfolio 7
Utility Curve
Optimum
Portfolio 0% 5%
10%
15%
20%
25%
Risk
= 99th Percentile of Retained Loss + Fixed Premium, collateral, frictional costs
Return
= Savings on Guaranteed Cost/No Retained Risk Premiums,
Collateral and other Frictional Costs G
Markets have hardened.
Went Southeast. Now
where do you go?
For the Same
Premium, you have to
retain more risk
For the same risk
retention, you have
to pay more
premium
Portfolio Analysis and the Efficient Frontier
Today, the markets have gone Southeast.
The question? Should I go straight East, Straight South, or ???

10. Thank You ! Robert F Wolf, FCAS, MAAA 312-930-0648
Mercer Oliver Wyman Actuarial Consulting, Inc.
Chicago, IL, US
phone
cell