**CAS Casualty Loss Reserve SeminarSeptember 18 - 19, 2000** Reserving for Asbestos Pure IBNR Kevin M Madigan RiverStone Resources

** ** Reserving for Asbestos Pure IBNR High Excess (Re)Insurers: • Have significant pure IBNR exposure • Have significant policy data issues • e.g. old policies/slips not in systems • Lack valuable qualitative information

** ** Reserving for Asbestos Pure IBNR How to Deal With These Issues? • Research known asbestos defendants • Match against policy database • May take significant effort to build DB • Use historical experience to project IBNR

** ** Reserving for Asbestos Pure IBNR Using Experience to Project Pure IBNR • We have developed 2 report year methods inspired by: • [1] Cross, Susan L. and Doucette, John P., “Measurement of Asbestos Bodily Injury Liabilities”, PCAS, Vol LXXXIV, Nos. 160 and 161, pgs 187 -300 • [2] Haidu, Jim, “Estimating a Reinsurer’s Liabilities for Asbestos and Environmental Losses”, 1996 CAS CLRS

** ** Reserving for Asbestos Pure IBNR Using Experience to Project Pure IBNR • Both methods use (report year) actual or modeled losses to arrive at a factor that is applied to exposed policy limits

** ** Reserving for Asbestos Pure IBNR Using Experience to Project Pure IBNR • Method 1 uses account experience • Method 2 uses policy experience • Should any of the historical experience be excluded?

** ** Reserving for Asbestos Pure IBNR Method I “Pricing” Approach • Allocate experience to layers • Calculate burn rates • Apply to potential IBNR policies

** ** Reserving for Asbestos Pure IBNR Method I Allocate experience to layers • Each account has an actual (closed accounts) or modeled (open accounts) annual loss distribution

** ** Reserving for Asbestos Pure IBNR Method I Calculation of Burn Rates

** ** Reserving for Asbestos Pure IBNR Method I • Ideally want burn rate confidence intervals, from which baseline confidence intervals can be selected for each layer

** ** Reserving for Asbestos Pure IBNR Method I • Apply Burn Rates to potential IBNR policies • Reporting Pattern(s)

** ** Reserving for Asbestos Pure IBNR Method I • Apply Burn Rates to potential IBNR policies • Reporting Pattern(s) • Trend Assumptions e.g. 2% annual decay in burn rate

** ** Reserving for Asbestos Pure IBNR Method I • Apply Burn Rates to potential IBNR policies • Reporting Pattern(s) • Trend Assumptions e.g. 2% annual decay in burn rate • Exposed Policy Limits

** ** Reserving for Asbestos Pure IBNR Method I

** ** Reserving for Asbestos Pure IBNR • Method I computes an annual ‘rate’ for each layer, and ‘charges’ the exposed policies the corresponding ‘price’. • Method II computes one factor to be applied to the limits of each policy

** ** Reserving for Asbestos Pure IBNR • But wait! We have a wide assortment of attachment points and policy limits, so it hardly seems right to apply the same factor to each policy. Does a $25M x $200M policy have the same exposure to loss as a $4M x $1M policy? Of course not!

** ** Reserving for Asbestos Pure IBNR Method II • Exposed policy limits are ‘adjusted’ as follows: • Adjusted exposure = TPE * Pr( GUL > AP) • where TPE = Total Policy Exposure • GUL = Ground-Up Loss • AP = policy Attachment Point

** ** Reserving for Asbestos Pure IBNR Method II • Calculate historical ratios of loss to adjusted exposure for each report year (let’s call them loss cost factors)

** ** Reserving for Asbestos Pure IBNR Method II • Calculate historical ratios of loss to adjusted exposure for each report year (let’s call them loss cost factors) • Select a base line confidence interval for the loss cost factors

** ** Reserving for Asbestos Pure IBNR Method II • Calculate historical ratios of loss to adjusted exposure for each report year (let’s call them loss cost factors) • Select a base line confidence interval for the loss cost factors • Make assumptions regarding reporting pattern(s) and cost trend(s)

** ** Reserving for Asbestos Pure IBNR Method II

** ** Reserving for Asbestos Pure IBNR Method II

** ** Reserving for Asbestos Pure IBNR Method II

** ** Reserving for Asbestos Pure IBNR Other Issues • Loss trend may be positive, or trend rate may not be constant • Distinguish products liability from other liability • Not only source of “pure” IBNR • Commutation strategy