1. © 2007 Towers Perrin September 11, 2007 2007 CLRS – San Diego, California Property Catastrophe Reserving – Approaches to large event reserving Christopher Bozman, FCAS MAAA

2. © 2007 Towers Perrin 2 What events should be reserved for separately Criteria should depend on: Magnitude, both to company and industry Will this be a disclosure item? Unique features —Coverage issues –wind vs. water –Earthquake vs. fire following –Single event vs. multiple events (e.g., southern California fires, UK floods) —Business interruption —Demand surge potential

3. © 2007 Towers Perrin 3 Reserving for large events – the first few weeks Initial estimates Output from cat models —Event “parameters” not known (e.g., central pressure, radius of maximum winds) —Similar events from probabilistic database —Impact of items not modeled (e.g., rainfall) Market share approach using PCS estimates —Historically PCS estimates have developed upwards —Market share results may not be reliable –Especially for smaller companies Initial feedback from claims department

4. © 2007 Towers Perrin 4 As loss information emerges, perform a claims based study Separate open counts between number with a “solid” initial estimate and those in which property has not been inspected yet Assign IBNR to each type using available data from previous events & judgment Track development on each of these claim types over time Project unreported claims Experience from previous events Decay in weekly reported counts Assign average severity values Understanding of why claims not reported

5. © 2007 Towers Perrin 5 As loss information emerges, perform a claims based study (continued) Discuss demand surge potential, coverage dispute potential with claims department May consider additional IBNR

6. © 2007 Towers Perrin 6 Loss Development techniques should also be used Construct loss development patterns from previous events Convert historical patterns based on number of days from event —Interpolation may be necessary —Accident quarter by quarter patterns may not be accurate enough Attempt to identify historical events with similar characteristics as event that you are reserving for: —Percentage of claims closed —Discussions with claims —Lag or accelerate patterns judgmentally

7. © 2007 Towers Perrin 7 Loss Development (continued) Explore benchmark patterns RAA catastrophe development study —Contains historical reinsurance patterns —Could judgmentally adjust for primary business –Consider reinsurance lags, size of event Other potential data —Department of Insurance data on industry payments over time —Statutory data for specific companies (e.g. Citizens in Florida)

8. © 2007 Towers Perrin 8 Reinsurers experience – 2 nd quarter evaluation Source: RAA Catastrophe Loss Development Study, 2006 Edition

9. © 2007 Towers Perrin 9 Here is the estimated % reported adjusted to an estimated 90 days past the event date Source: RAA Catastrophe Loss Development Study, 2006 Edition

10. © 2007 Towers Perrin 10 Reserving for large events – Excess and Reinsurance Identify all contracts potentially impacted Reflect all pertinent contract information Attachment point Limit Reinstatement provisions Inuring reinsurance Calculate expected IBNR for each contract on a from ground up (FGU) basis Simulate FGU IBNR by contract using different coefficient of variation (CV) assumptions Apply reinsurance contract information to calculate reinsurer’s losses

11. © 2007 Towers Perrin 11 Reserving for large events – potential assessments Important to understand potential for post event assessments and what mechanisms (if any) are in place for recoupment Assessments could be used for funding of Insurers of last resort/residual market pools —Florida Citizens Insurance Co. —Louisiana Citizens Insurance Co. —Texas Windstorm Insurance Association —Mississippi Windstorm Underwriting Association State run reinsurers —Florida Hurricane Cat Fund (FHCF) State guaranty associations California Earthquake Authority

12. © 2007 Towers Perrin 12 Reserving for large events – potential assessments (continued) Different types of assessments “Regular” assessments through premium taxes —E.g. in Mississippi, for the purpose of assisting the Windstorm Underwriting Association in purchasing reinsurance (currently to a 1 in 100 year event) Special Assessments —To help pay for losses post-event —Limited to a certain % of assessment base —Generally recoupable over time via policyholder surcharges or premium tax credits –1 st $300 million of assessments in Texas are not explicitly recoupable

13. © 2007 Towers Perrin 13 Reserving for large events – potential assessments (continued) Different types of assessments (continued) Emergency assessments post event —Florida, Louisiana, and Mississippi —Provides collateral backing up state issued bonds —Insurers envisioned as “collection” agents –Insurers attach additional charge to policy premiums. –There still may be a time lag between time assessments are paid and when they are collected from policyholders States can force insurers to purchase bonds unsold after a certain period of time

14. © 2007 Towers Perrin 14 What all this means to the actuary Estimation of ultimate losses should include projection of assessments Recent legislative changes have magnified the importance of this issue Accounting issues Are assessments losses or expenses? How should potential future reimbursements be recorded?

15. © 2007 Towers Perrin 15 What all this means to the actuary (continued) Liquidity challenges may be significant after a large event Payment of gross catastrophe claims In Florida, potential that FHCF will be unable to provide timely reimbursements to cedents “Up front” payment of assessments could be significant Potential for forced placement of bonds could drain liquidity further The significance of the above factors are all correlated to the size of the storm

16. © 2007 Towers Perrin 16 In the event of an active Florida hurricane season in 2007, most claim payments will be funded after-the- fact Notes: Pre-event funding includes funds available to Citizens, FHCF, and private carriers, plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present-value basis and does not include cumulative financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in the 2007 season”.