2009 Seminar for the Appointed Actuary

Colloque pour l’actuaire désigné 2009

2009 Seminar for the Appointed Actuary

Colloque pour l’actuaire désigné 2009

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

Property and Casualty Insurance Ratemaking Committee - update

- Blair Manktelow- Shams Munir

2009

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2009

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Status Update

• Exposure draft is not yet approved by the ASB

• ASB meeting later this month to hopefully approve

• 60-day comment period once released• Revisions will be incorporated• Final version hopefully approved in 2010

2009

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2009

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Definitions (page 1 of 2)• Credibility is a measure of the predictive

value attached to an estimate based on a particular body of data

• Credibility procedure is the blending of information from the subject experience with information from one or more sets of related experience

• Indicated rate is the best estimate of the premium rate to be charged to the insured20

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Definitions (page 2 of 2)

• Related experience includes premiums, claims, expenses, and other relevant data for coverage analogous to the coverage under consideration other than the subject experience and may include established rate levels or differentials or external data

• Subject experience includes premiums, claims, exposures, expenses, and other data relevant to the coverage under consideration

• Trending is the process of evaluating how changes over time affect a variable, and adjusting projected estimates of that variable to levels that are anticipated for the forecast period20

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Scope (page 1 of 3)• Apply to property and casualty insurance;

• that is, insurance to possessors of tangible or intangible property for costs arising from loss of or damage to such property (e.g. fire, fidelity, marine hull, warranty, and title insurance), and insurance to individual or other legal persons, for costs or damages to others arising from the actions of such persons (e.g. liability and mortgage loan insurance and surety bonds) and for costs arising from injury to such persons (e.g. automobile accident benefits insurance)

2009

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2009

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Scope (page 2 of 3)

• Standards do not apply to public personal injury compensation plans

• Apply to the derivation of indicated rates for P&C insurance. May also provide useful guidance for the derivation of indicated rates for enterprises that are not incorporated insurers

• Do not apply to the selection of rates

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2009

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Scope (page 3 of 3)

• Ratemaking is generally prospective because the indicated rate is usually developed prior to the transfer of risk

• Indicated rate provides for all costs so that the insurance system is financially sound

• Equity across insureds is maintained by providing for the costs of an individual risk transfer. An indicated rate from aggregate experience of similar risks is an estimate of the cost of the risk transfer for each individual in the class

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2009

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Methodology

For an insurance coverage to be provided over a specified period of time, the actuary should derive an indicated rate such that the present value of the future cash flows relating to the expected revenue at the indicated rate equals the present value of the future cash flows relating to the corresponding expected claim costs, expense costs, and provision for profit.

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2009

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Methodology – sub sections

a. Data

b. Changes in Risk

c. Claim Development

d. Trending

e. Experience adjustments

f. Credibility

g. Expenses

h. Provision for Profit

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2009

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Data (Methodology)

• Identify the source & time period covered by the data

• Assess the relevance, appropriateness, and sufficiency of the data

• Assess the quality (accuracy, reliability) of the data

• Understand the general characteristics, format and content of the data

• Gain familiarity with the system & transactions that record the data

• Gain familiarity with the general contractual terms and benefits provided by the insurance coverage

• Check or reconcile the data for consistency2009

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2009

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Changes in the Risk (Methodology)

Reflect factors that were or are largely under the control of the insurer, such as

• underwriting standards or methods,

• case reserve setting standards and practices,

• claims management policies and practices,

• the mix or type of business written,

• reinsurance arrangements, and

• insurance product policy wordings, benefits or coverage

2009

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2009

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Changes in the Risk (Methodology)

Reflect factors that are largely outside the control of the insurer, such as

• legislated coverages or benefits,

• the economy,

• the social environment,

• the political environment, and

• the legal environment

2009

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2009

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Claim Development (Methodology)

The actuary:

• would subdivide the data in an appropriate fashion by length of time period (year, half year, or quarter year) AND time intervals grouping (e.g., by accident period, policy period, or calendar period),

• avoid groups whose data are too sparse for reasonable analysis AND would subdivide the data into reasonably homogeneous sub-groups of similar types of claims

• would select the experience period of the data to project ultimate claims with reasonable reliability,

• might include analysis of related experience• might include appropriate adjustments to the data to restate

them to remove the effect of intervening changes within the insurance environment

• would select appropriate methods to estimate the ultimate claim costs

2009

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2009

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Trending (Methodology)

• Applies to claims, premiums and exposure trending

• Considerations subdivided between considerations relating to selection, subdivision and analysis of data

2009

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2009

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Trending (Methodology)

Selection of Data

• availability, degree of accuracy and homogeneity of the data, and

• relevance of the data (i.e., similarity to the jurisdiction, coverage and/or sub coverage, kind of loss, company, etc. for which the indicated rate is being derived)

2009

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2009

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Trending (Methodology)

Subdivision of the Data

• categorizing the data into time intervals AND time intervals groupings, weighed against any resulting loss of data stability or responsiveness,

• categorizing the data into separate components weighed against any possible masking of underlying correlations

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Trending (Methodology)

Analysis of the Data

• changes in the underlying risk

• Credibility

• Seasonality

• Time interval

• length of the experience period

• length of the forecast period

• economic, social, demographic, or environmental influences

• trending procedures established by precedent or common usage or performed in previous analyses

• the use of mathematical models to identify and extrapolate trends; the success of the model in making prior projections, and the statistical goodness of fit of the model to the data 20

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Trending (Methodology)

Analysis of the Data (continued)

• fluctuation in the data points, the relative weights given to each data point and changes in historical patterns

• uncertainty surrounding the estimated ultimate values of the data

• the degree to which past trend patterns may or may not be reflective of future trend patterns

• reasonableness of the results produced by the analysis

2009

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Experience Adjustments (Methodology)

To remove biases and distortions in the experience from

• Impact of large & catastrophic claims• Regulatory or legislative changes• Seasonality• Reinsurance recoveries• Changes in the mix of business• Changes in underwriting rules• Shifts in the distribution of rating variables• Data errors• Changes in rate level

2009

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Credibility (Methodology)

Considerations:

• various actuarial methods for determining credibility• generally accepted practices• homogeneity of the subject experience and the related

experience• relevance of the related data• independence of the subject experience and the related

experience• biases that may exist in the credibility method or related data

used• practicality of application• availability of data• predictive power of the estimation procedure• reasonableness of results

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Expenses (Methodology)

• May be specified

• Comprises all costs other than claim costs & profit, including

• Claim adjustment expenses• Commissions & Other Acquisition Expenses• General Administration• Policyholder Dividends• Reinsurance Costs• Residual Market Expenses• Statutory Assessments, Taxes, Licenses and fees

2009

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Expenses (Methodology)

Considerations

• past expenses

• changes in conditions that may cause past expenses not to be reflective of future expenses

• changes that may have occurred in the way expenses are measured

• one-time expenses and whether or not such expenses would be amortized

• whether expenses that are not, by their nature, directly proportional to premium would be imputed on a per policy, per coverage, percentage of claim costs, or per unit of exposure basis

• whether expenses vary based on the distribution system

• whether expenses vary between new and renewal policies2009

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Profit Provision (Methodology)

• Silent on considerations

• This profit provision is not the same as what is commonly referred to as underwriting profit

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Reporting

Currently no standard reporting language other than in certain automobile rate filings. If required these could be used.

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Standard Reporting Language

actuary responsible for all assumptions:

I have prepared the indicated rate[s], or range of indicated rate[s], on behalf of [official name of “insurer”], for the following insurance coverage[s]: [name of coverage(s)].

I have derived the indicated rate[s], or range of indicated rate[s], to be effective [Month XX, 20XX] for new business and [Month XX, 20XX] for renewal business.

In my opinion, the indicated rate[s], or range of indicated rate[s], has [have] been calculated in accordance with accepted actuarial practice in Canada.

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Modified Reporting Language

actuary does not take responsibility for all assumptions:

I have prepared the indicated rate[s], or range of indicated rate[s], on behalf of [official name of “insurer”], for the following insurance coverage(s): [name of coverage(s)].

I have derived the indicated rate[s], or range of indicated rate[s], to be effective [Month XX, 20XX] for new business and [Month XX, 20XX] for renewal business.

In my opinion, the indicated rate[s], or range of indicated rate[s], has [have] been calculated in accordance with accepted actuarial practice in Canada.

However, I have not taken responsibility for the following assumptions as stipulated by the terms of the engagement:

(A listing of assumptions for which the actuary does not take responsibility would follow.)20

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Property and Casualty Insurance Ratemaking Committee :

• Blair Manktelow• Shams Munir• Ron Miller• Ted Zubulake• Jean-Francois Larochelle• Mylene Labelle• Betty-Jo Walke

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