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WC - Excess Pricing

WC - Excess Pricing. A National Accounts (Primary) Perspective Steve Basson The Travelers. Distinctions. Small accounts Guaranteed Cost Pricing tied to Manual Rates (Loss Costs) Basic & Excess Premium is Packaged together Large accounts Typically 1MM of Standard Premium and Up

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WC - Excess Pricing

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  1. WC - Excess Pricing A National Accounts (Primary) Perspective Steve Basson The Travelers

  2. Distinctions • Small accounts • Guaranteed Cost • Pricing tied to Manual Rates (Loss Costs) • Basic & Excess Premium is Packaged together • Large accounts • Typically 1MM of Standard Premium and Up • Retro Rated, Large Deductible or SIR • Risk Transfer is Excess of Ded / SIR • Significant Tailoring (negotiating) of Excess Price • examples WC - Excess Pricing

  3. Overall Approach • Determine Loss Costs @ Frequency Layer • Layer Price Excess Layers to Clients Retention • Layer Price Excess Layers beyond Retention • Frequency layer is the base for excess layers • Maintain pricing Integrity WC - Excess Pricing

  4. Overall Approach • Layer Price (ex. 250K Retention) Who owns Cost 1st 100K Client ________ 100K - 250K Client ________ 250K - 500K Excess (insured) ________ 500K - 1MM Excess (insured) ________ 1MM - 2MM Excess (insured) ________ 2MM - Stat Excess (insured) ________ WC - Excess Pricing

  5. Overall Approach • Advantages of Layer Pricing • Assigns Costs (properly) to layers • Allows a “funding” mentality • Promotes better reinsurance buying decisions • both facultative & treaty • Allows client to make better decisions regarding retention • Evaluation - Loss / profitability studies can be done WC - Excess Pricing

  6. Loss Costs @ Frequency Layer • What is the Frequency Layer? • 10% Rule • Existence of a few losses in a layer • Loss Rate or use Frequency / Severity Approach • Trend & Develop Losses & Counts • Benefit Level Adjustments • Compute onleveled Losses • Rating done at a Frequency Layer • Relate Loss Costs to Exposure • Compute Next Years Loss Projection WC - Excess Pricing

  7. Loss Costs @ Frequency Layer (100K)Example using Loss rates Yr Proj. Ult Loss OL Payroll Loss Rate 1995 5,553,990 454.5M 1.222 1996 6,344,100 492.5M 1.288 1997 5,598,441 516.8M 1.083 1998 7,074,556 552.0M 1.282 Proj. 1999 8,075,349 618.9M 1.305 1.24 Payroll for 2000 = 650M (est) Loss Projection at 100K = 8.06M WC - Excess Pricing

  8. Loss Costs @ Frequency Layer • Loss Rate - Frequency / Severity Approach • Approach can be Paid or Incurred • Use Internal LDFs • Account Specific LDFs for Larger clients • Should Loss Rate at several Limits!!! • Could have done same process with Frequency & Severity • Uniqueness of Large Account LDFs • Clients often involved in reserve setting • Clients usually involved in settlement • Better Risk Mgmnt (Light Duty, etc.) WC - Excess Pricing

  9. Increased Limits Factors • Internal ILF reviews • State Specific (for larger states) • Blended w/ NCCI information at higher layers (>= 1MM) • Split to Hazard Groups (I - IV) • ILFs can be “layer” or “to unlimited / stat” • Layer : Layer ILFs determined by division • 50K ILF 2.00 • 100K ILF 1.5 • 50 - 100K ILF 1.333 WC - Excess Pricing

  10. Determine Loss Rate @ Retention • Loss Rating Done at Frequency Layer(s) • Advantage of Loss Rating at several limits • Need to Extend to Retention (if not there already) • Some Severity Characteristics may emerge • Loss Rating @ ILF-Stat Loss Rating ILF to 100K ILF to 250K 50K 1.64 7,100,000 8,438,000 9,953,000 100K 1.38 8,000,000 9,436,000 250K 1.17 9,020,000 What is the message? WC - Excess Pricing

  11. Determine Loss Rate @ Retention Loss Rating @ Expect. Loss ILF Extension to 250K 50K 7,100,000 9,953,000 100K 8,000,000 9,436,000 250K 9,020,000 Need to Determine estimate AT the 250K Retention Many judgement Calls (different signals) Client can use to “Accrue” / Budget Excess Losses are based on this number NOT discounted for Time Value WC - Excess Pricing

  12. Layer Pricing XS Layers • Using ILFs - Layer Price Excess Layers • Same set of ILFs (State / Hazard Group) • Internal ILFs • Discounted for Time Value of Money (can be state specific) • Room for judgement based on Severity characteristics in frequency layer(s) • Credits & Debits are monitored • Sold versus Guide WC - Excess Pricing

  13. Layer Pricing XS Layers ILF Undisc. Discounted Cost Cost (%) 1st 250K 9,000,000 250 - 500 1.065 585,000 439,000(75) 500 - 1MM 1.038 364,000 182,000(50) 1MM + 1.030 298,000 119,200(40) WC - Excess Pricing

  14. Layer Pricing XS Layers • ILF Issues • How can I charge $X for a layer, when there aren’t any losses? • Adjustments should be minimal in higher layers • Limit judgement, where there isn’t credibility / predictability • How can I adjust the XS price to reflect the (low) severity? • Cost Structure needs to be explained in English WC - Excess Pricing

  15. Layer Pricing XS Layers Claims Excess of 250K (500 LT claims in total) 1995 1996 1997 1998 1999 315 300 325 - - 500 How can we charge X$ Excess of 500K, with no claims? “Expect 1 (maybe 2) claim(s) per year excess of 250K”? WC - Excess Pricing

  16. Layer Pricing XS Layersfreq. Per 100 claims 0$ 1 - 25K 25 - 50 50 - 100 100 - 250 250 - 500 500 - 1MM 1MM + Total 6 25.735 70.500 2.800 0.700 0.200 0.040 0.020 0.005 100.000 18 13.610 77.600 5.730 2.400 0.550 0.080 0.020 0.010 100.000 30 11.837 77.800 5.700 3.200 1.300 0.120 0.030 0.013 100.000 42 11.117 78.200 5.500 3.200 1.700 0.170 0.040 0.013 100.000 54 10.293 78.500 5.700 3.300 1.890 0.240 0.060 0.014 100.000 66 9.235 78.500 6.080 3.630 2.100 0.350 0.080 0.025 100.000 78 8.225 78.100 6.500 4.000 2.600 0.440 0.100 0.035 100.000 . . . . . . . . . . . . . . . . . . . . 120 7.590 77.900 6.600 4.300 2.800 0.600 0.140 0.070 100.000 WC - Excess Pricing

  17. Layer Pricing XS Layers Expect @ 500 Claims 6 18 30 42 54 Ult. 250 - 500 .20 .40 .60 .85 1.2 3.3 500 - 1MM .10 .10 .15 .20 .30 .80 1MM + .025 .050 .065 .065 .070 .40 Actual (tot 500 Claims) 6 18 30 42 54 Ult 250 - 500 0 0 1 1 2 ? 500 - 1MM 0 0 0 0 0 ? 1MM + 0 0 0 0 0 ? WC - Excess Pricing

  18. Layer Pricing XS Layers Layer Avg Expect # Cost 250 - 500 75,000 3.30 547,500 500 - 1MM 150,000 .80 320,000 1MM + 600,000 .40 240,000 WC - Excess Pricing

  19. Layer Pricing XS Layers COMPARISON (Undiscounted) Using ILFs Using Freq. 250 - 500 585,000 547,500 500 - 1MM 364,000 320,000 1MM + 298,000 240,000 Note: This approach can also be used on Frequency Layers WC - Excess Pricing

  20. Layer Pricing XS Layers Discounting for Time Value of Money • Generally Use Paid LDFs • State Specific where possible • Very sensitive to Settlement practices • Little to no tailoring account x account • For 250 x 250 Layer • Subtract 250K curve from 500K curve (ILF Adj) • Discount to time zero WC - Excess Pricing

  21. Layer Pricing XS Layers WC - Excess Pricing

  22. Misc. WC Excess Issues • Multi-Claimant Events • Aggregate in XS Layers • Medical Inflation • NCCI ELPFs / ILFs • Risk Loads WC - Excess Pricing

  23. Wrap Up • Workers Comp Excess Pricing - Large Accounts • Layer Priced of Frequency Layers • Some tailoring for severity • Extension / Layer Pricing of Insured Layers • Cross Check with Frequency Approach • Discount for Time Value of Money • Make decisions • Pricing, Retentions • Reinsurance WC - Excess Pricing

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