1. Introduction to Experience Rating
Munich Re
Introduction to Experience Rating
Tice R. Walker, FCAS, MAAA
Vice President, Munich Reinsurance America, Inc.
CAS Ratemaking Seminar
Atlanta, Georgia
March 8, 2007
13/09/2018

2. Agenda What is Experience Rating? An Example
Munich Re
Agenda
What is Experience Rating?
An Example
Some Preliminary Stuff
Some Calculations
Pulling It All Together
Advantages / Disadvantages
Questions?
Questions at any time, not just the end.
13/09/2018

3. What is experience rating?
Munich Re
What is experience rating?
Method of estimating prospective treaty loss costs using historical client experience.
Subject Premiums
Subject Claims
“Subject” meaning as defined by the treaty.
13/09/2018

4. Some Preliminary Stuff
Munich Re
An Example
Some Preliminary Stuff
Terms of Subject Business
$100k xs $100k
Losses Occurring basis
LAE is pro-rata
Estimated Subject EP = $40M
Information provided
Historical Premium, adjusted to prospective earned rate level
Premises Liability only, Table 1
List of individual claims, Loss greater than $50k, plus ALAE, each at successive annual evaluations
Loss Occurring versus Risks Attaching
Pro-rata versus Part-of-Loss
Prospective Earned rate level versus Current rate level
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5. Some Calculations Historical Experience
An Example
Some Calculations
Historical Experience
Note: Fictitious data – for illustration only

6. Some Calculations Historical Experience
Munich Re
An Example
Some Calculations
Historical Experience
Does the math work as you move from left to right? What about 2005 and 2006?
Note: Fictitious data – for illustration only
13/09/2018

7. Some Calculations Historical Experience
An Example
Some Calculations
Historical Experience
Note: Fictitious data – for illustration only

8. Some Calculations Historical Experience
An Example
Some Calculations
Historical Experience
Note: Fictitious data – for illustration only

9. Some Calculations Historical Experience
Munich Re
An Example
Some Calculations
Historical Experience
New claims are in bold
Note: Fictitious data – for illustration only
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10. Pulling It All Together
Munich Re
An Example
Pulling It All Together
Projected Burn Cost
How are XS LDFs calculated?
Note: Fictitious data – for illustration only
13/09/2018

11. Pulling It All Together
Munich Re
An Example
Pulling It All Together
Other Thoughts
Can I apply trend and development in a different order?
Do frequency and severity trends vary by size of loss?
What about excess/umbrella, SIR or large deductible policies?
Is this method only applicable to reinsurance?
Think so. All the algebra works, but it would require much more data manipulation.
Aggregate XS trend, that reflects policy limits?
LDFs
My example implicitly assumes trends do not vary.
Impact of WC reforms
What about Indemnity vs expense? Do they trend differently?
How does trend affect claims the farther away from the ground?
NEXT SLIDE
13/09/2018

12. Pulling It All Together
Munich Re
An Example
Pulling It All Together
SIR, Umb, etc.
Describe difference in treatment.
Supported vs. Unsupported
Relative Attachment vs. Absolute Attachment
Note: Fictitious data – for illustration only
13/09/2018

13. Pulling It All Together
Munich Re
An Example
Pulling It All Together
Other Thoughts
Can I apply trend and development in a different order?
Do frequency and severity trends vary by size of loss?
What about excess/umbrella, SIR or large deductible policies?
Is this method only applicable to reinsurance?
Can also be used for individual risk, large accounts, ELR
13/09/2018

14. Advantages / Disadvantages
Reflects client’s actual layer experience
Works best with high frequency layers
Data may be adjusted to reflect current exposures

15. Advantages / Disadvantages
Munich Re
Advantages / Disadvantages
Disadvantages
Requires lots of data
Changes in limits (drift?) and exposures may reduce credibility of historical experience
Projections can vary wildly due to small number of claims
Free Cover
The more data we have, the more credible the indication
If the drift is gradual, similar to severity trend, one could not cap claims at historical limits. (Be mindful of on-leveling premium to reflect changes in limits being purchased.)
Low frequency layers have less credibility
This happens if the layer being rated has no trended claims that burn all the way through the layer - layer is not fully exposed x 250 layer with a maximum trended claim of 650 => 350 of free cover, only 400 of 750 is exposed.
13/09/2018

16. Questions?
Questions?
© Copyright 2007 Munich Reinsurance America, Inc. All rights reserved. The Munich Re America name is a mark owned by Munich Reinsurance America, Inc.
The material in this presentation is provided for your information only, and is not permitted to be further distributed without the express written permission of Munich Reinsurance America. This material is not intended to be legal, underwriting, financial, or any other type of professional advice. Examples given are for illustrative purposes only.