Hurricane Loss Reserving Presentation by Joseph Boor, FCAS

1. Hurricane Loss ReservingPresentation by Joseph Boor, FCAS 2006 CLRS September 13, 2006

2. Hurricane Loss Reserving • Notable Recent Hurricanes • 2004 Florida hit by 4 hurricanes • 2005 • Katrina Hits Alabama-Louisiana Coast • New Orleans • Florida hit by two • Dennis – Panhandle • Wilma – Unsung major storm

3. Hurricane Loss Reserving • Aftermaths • 2005 • Major reserve adjustments for some Florida homeowners specialists • 2006 • Insolvency of Poe companies in Florida • Continuing litigation over wind vs. flood damage post Katrina • Rebuilding issues in New Orleans

4. Hurricane Loss Reserving • Major Actuarial Issues • Some new cos/new (to storms) actuaries • Not sure how to address hurricanes in reserving • Will discuss issues later • Coverage Issues Create Contingent Liabilities? • Outside scope of this talk

5. Hurricane Loss Reserving • Technical Actuarial Issues • Large number of claims on one accident date • Distorts accident year pattern • Processing lags induced by high claims volume • Potential for higher severities • Complex reinsurance programs applicable

6. Hurricane Loss Reserving • Widely available information • RAA Catastrophe development patterns • But, at least part of this is direct, not net • Possibly other similar data • In a phrase, slim pickings.

7. Hurricane Loss Reserving • Response of actuaries • Large Cos • Have data on prior storms & use it. • Small Cos (& their consultants) • Varies by person • Some instances of actuaries accepting co numbers at face value

8. Hurricane Loss Reserving • What can the small co actuary do? • Want to present a method • No reliance on external data • Possible for one or two actuaries to execute using personal computers • Have done it myself using • outdated state government personal computers and • Circa 2000 Microsoft Office software

9. Hurricane Loss Reserving • Basic Concepts • Develop the direct loss for each storm • Use 2004 data to make LDFs for 2005 storms, etc. • Use techniques that solve the special problems • Then, reflect reinsurance program

10. Hurricane Loss Reserving • Direct Loss Reserving Issues • All the storm’s claims share a single accident date • June storm needs different 12/31 LDF than November storm • Different severity than other claims as well • Different severities between storms? • Potential for payment/reserving lags due to heavy claims volume • Possibility that lags differ storm to storm

11. Hurricane Loss Reserving • How to solve the problems • No. 1 - All the storm’s claims share a single accident date • Begin by analyzing data grouped by hurricane • Period of development is month (or week) since the hurricane occurrence date.

12. Hurricane Loss Reserving • Analyzing data for each hurricane • This may initially create a data processing problem (identifying the claims for each storm) • but using accident date it is usually not too hard to get a list of the claim numbers for each storm- computer data crunching can then do the rest • Co. may store PCS cat number in claim master file

13. Hurricane Loss Reserving • Analyzing data grouped by hurricane • What to analyze? – dollar data elements • Paid loss (&DCC) • Paid outside adjuster costs • Incurred loss (&DCC) • Incurred outside adjuster costs

14. Hurricane Loss Reserving • Analyzing data grouped by hurricane • What else to analyze? – count data elements • Number of closings (number of times any claim has been closed-set to zero reserve • Number of claims reported • Number of reopenings • Similar data for the AOE portion

15. Hurricane Loss Reserving • Solving the single occurrence date problem • Data laid out in last two slides solves the problem • Paid loss development, etc. is no longer a triangle

16. Hurricane Loss Reserving • Loss development, whatever sort, is no longer based on a triangle • Series of lines across the page-one for each hurricane • I organize alphabetically by storm name • May have short line (for recent storm) in the middle of long lines

17. Hurricane Loss Reserving • Example of Hurricane development ‘lines’

18. Hurricane Loss Reserving • Keys to understanding hurricane development • Not all hurricanes are alike • For the most part, Rita was weak and had ‘smallish’ claims • In it’s target areas, Wilma was strong and generated more expensive claims

19. Hurricane Loss Reserving • Reserving problem 2 -difference in claim severities between storms. • One dubious benefit of having four storms in 04 is that had 4 very different storms w/ very different claim sizes. • Can compare the paid per closed claim on those at maturities matching Rita and Wilma’s 12/05 maturities

20. Hurricane Loss Reserving • Reserving problems 3 and 4 -Payment/reserving lags and Differences in lags between storms • For most carriers, since Wilma was big and Rita was small, Wilma generated significantly more processing lag than Rita. • Measure this by reporting pattern of claims and % closed by dev. month.

21. Hurricane Loss Reserving • Keys to understanding hurricane development • Experience w/some carriers is that many claims reopen • In 2004, often too many

22. Hurricane Loss Reserving • Dealing with Reopenings • Have to not just compare % closed to reported for prior storms at matching maturies-have to compare the % of previously closed that have since reopened. • No specific formula • Seek best assessment from data

23. Hurricane Loss Reserving • Florida-Specific??? Issue – Heavy Reopenings in 2004. • Some companies experienced demand surge/other factors so much that their initial closing payments might be woefully inadequate to fix houses- result – massive reopenings. • Would it happen with 2005 claims?

24. Hurricane Loss Reserving • Analyzing chance of 05 storm reopenings. • Key statistic to review- #reopenings/#claims closed for Wilma (at 2 months) vs. major 04 storms at 3 months maturity.

25. Hurricane Loss Reserving • Reopening Data • By-product of the calendar month processing approach we used was the number of reopenings and claim closings in each month • Closing - any day a claim has $$ activity and ends with a zero reserve. • Reopening – any time a claim starts the day w/a zero reserve but has $$ activity.

26. Hurricane Loss Reserving • Issues w/ Reopening Data • A claim that has a supplemental single (unreserved) payment made after closing generates a reopening and a closing on the same day. • But, it’s objective.

27. Hurricane Loss Reserving • Formulas for key closing and reopening statistics • Closed claims at date x = #closings through x - #reopenings through x • Most key reopening statistic = #reopenings through x/#closed through x

28. Hurricane Loss Reserving • Synthesis of development approaches using prior hurricane data • Look for prior-developing hurricane that has best fit • Consider, size, reopenings, etc. to determine best fit • Consider using LDF based on that hurricane’s data.

29. Hurricane Loss Reserving • Direct Loss development – footnotes • All the issues with loss development (tail development, picking links from data, etc.) apply. • May use alternate method – Average unpaid loss per unclosed claim or average unpaid loss per future closing – or others.

30. Hurricane Loss Reserving • How did we create the data? • We got extracts of each company’s claims master file and claims transaction file and processed using Microsoft Access 2000 (computers obsolete as well) and created data • Had over $1 billion in ultimate loss

31. Hurricane Loss Reserving • Can you create the data? • Talked to very, very, large Florida writer • They do similar things with modern Access and modern computers. • You very likely have the processing power to this for your company(s) • Access has a few quirks, but we did this with pretty limited expertise.

32. Hurricane Loss Reserving • Do you know what data files to ask for? • Too much to discuss here. • Bottom line - We got what we needed even though the company(s) had to process it a little to get what we thought was on the master and transaction files.

33. Hurricane Loss Reserving • Have done direct-but why bother with direct and ceded to get net? • Why not just triangulate net?

34. Hurricane Loss Reserving • As we’ll see, most Florida companies have extensive excess-of-loss reinsurance that attaches on even modest hurricanes • Once it attaches, development is either slowed significantly (‘open sliver’) or halted (full coverage) • If it becomes exhausted, development may begin again in earnest.

35. Hurricane Loss Reserving • Direct to Net • The skinny is-you need to estimate the direct and then apply the reinsurance to get to the net. • If you’re near to a limit on coverage, might be worth stating as a risk of material averse deviation.

36. Hurricane Loss Reserving • Next Issue – Getting to Net – Applying the Reinsurance Program.

37. Hurricane Loss Reserving • Applying the Reinsurance Program • Most important aspect of applying the reinsurance program is understanding how the program works. • I audit some insurance companies that actually have a great reinsurance program- but have great difficulty describing how the different pieces work.

38. Hurricane Loss Reserving • Key Features of Most Small Company Reinsurance Programs • Quota Share • First Layer Excess • Florida Hurricane Catastrophe Fund (FHCF) • High Excess (Beyond Cat Fund)

39. Hurricane Loss Reserving • Other Common Treaties • ‘Sliver’ or ‘Market Excess’ Beside Cat Fund • Per Risk Excess

40. Hurricane Loss Reserving • How the structure works – Quota Share • Since company is a small, growing company, workhorse of the program is quota share treaty • Quota Share will pay x% of all loss and DCC (if through a separate company, often AOE as well)- Subject to recovery caps per occurrence and per treaty year • the % covered usually applies to losses net of the cat fund – and maybe net of some other excess treaties.

41. Hurricane Loss Reserving • How the structure works – Cat Fund • Florida only feature – covers only Florida losses • Covers 90% of loss only excess of a per-hurricane retention(applicable to loss only), with max recovery per hurricane. • Also, adds 5% of loss recovery for LAE • Effectively covers 94.5%= 1.05*90% of loss only between retention and limit.

42. Hurricane Loss Reserving • Digression – a few cat fund details • Statewide retention and limit multipliers common to all carriers • These are multiplied by each carrier’s May- April premium • Premium Based on early in period (June 1?) inforce exposure times cat fund rates by exposure type • Can look up common retention and limit multipliers + company premiums on cat fund website

43. Hurricane Loss Reserving • How the structure works – First Layer Excess • Has retention lower than cat fund • retention and limit usually based on loss and LAE, not just loss • Why first layer excess? • Usually, cat fund retention represents too much risk in relation to cos’ surplus.

44. Hurricane Loss Reserving • How the structure works – High Excess • Usually attaches once cat fund exhausted • If loss only, would attach at cat fund retention +100*limit/94.5. • attachment and limit usually based on loss and LAE, not just loss • May yield complex calculation for attachment • Why high excess? • Typically, cat fund does not supply enough limit for all potential storms- cos need more limit. • May have a tower of several high excess layers

45. Hurricane Loss Reserving • How the structure works – ‘Sliver’ or ‘Market’ Covers • Illustrate by example • If have • quota share of 50% (cat fund inuring) • cat fund retention of 100M • a 300M loss+$21M LAE, • then the company suffers a $100M loss (+LAE in 1st $100M layer of $7Mish) up to the cat fund retention • quota share reduces the net loss and LAE (up to cat fund retention) to $53.5M

46. Hurricane Loss Reserving • Sliver Cover Illustration Continued • Cat fund covers 94.5% of $200M • = $189M recovery from cat fund • the remaining $11M +$14M LAE = $25M is unreinsured by the cat fund • quota share reduces this to $12.5M • Sliver cover would attach at ‘around’ the cat fund attachment, • would cover the portion left after the cat fund and the quota share • especially the LAE. • Usually, would max at at around cat fund loss max (retention +(1/.945)*limit) • Since it covers small %, but acts over the broad range of loss cat fund covers, it is ‘skinny’ & hence is a ‘sliver’.

47. Hurricane Loss Reserving • How the structure works – Per Risk Excess • Covers the excess of the attachment on an individual property • attachment selected in advance applies to all locations covered. • This often applies before (inures to the benefit of) all other reinsurance. • As yet, not found to be a significant factor in hurricane reserving

48. Hurricane Loss Reserving • Applying the Reinsurance Program to Direct Loss and LAE • Hardest thing often getting a clear description of the program • attachments of each component • On loss only or loss +LAE basis? • % of loss (or loss+LAE?) component covers • Limits on coverage

49. Hurricane Loss Reserving • Limits on coverage you may see • per occurrence limit • Excess layers have this naturally, quota share often does as well • limit on reinstatements • And were they purchased? • aggregate limit on recoveries • quota share-as % of premium • Excess layers may have in lieu of reinstatements • loss only vs. loss and LAE

50. Hurricane Loss Reserving • Limits Continued • In some treaties (noted in quota shares), how the limit is calculated may be a little ambiguous • Be sure you understand whether or not any issues are there.