Pricing Excess and Surplus Lines (COM-4) Ronald J. Herrig, FCAS Markel Corporation Deerfield, Illinois
Dec 25, 2015
Pricing Excess and Surplus Lines(COM-4)
Ronald J. Herrig, FCAS
Markel Corporation
Deerfield, Illinois
What Is the Surplus Lines Industry?
The Surplus Lines industry provides a market for hard-to-place risks; risks the standard market chooses not to write.
Why are these risks not written by the standard market?
• Distressed Risks/Markets
• Unique Risks
• High-Capacity Risks
Distressed Risks – Something about the risk itself
that makes it undesirable to the standard market.
• Start-Up Manufacturer – No track record
• New Physician
• Physician with a History of Drug-Abuse
Distressed Markets – Something about the
entire category of risks that makes it undesirable to the standard market.
• OB/GYNs - SOL
• Junk Yards
• Nutritional Supplements – What’s the new Ephedra?
Unique Risks – Characteristics of the risk make it too unusual to fall within standard U/W classes.
• Fireworks Accounts
• Shamu Transportation
• Architectural Projects
High-Capacity Risks – Risks needing high limits of protection and in-depth underwriting
• High Rise Buildings
• Directors & Officers
• Aviation Property/Liability
How Can Surplus Lines Companies write this Junk
(Profitably)?
By being Fast, Fluid and Flexible!
Regulation
• No need to file rates/forms
• Licensing required only in state of domicile
• Not an unregulated industry, though
Regulations That Do Apply
• Annual Statements
• Triennial Reviews
• Market Conduct Exams
• Risk-Based Capital Requirements
• SEC Requirements
Adaptable Policies
• Claims-Made Coverage
• ALAE included within Limits
• Sublimits
• Customized Endorsements
And most importantly…
Expert Underwriting
Underwriters need:• to understand their
company’s appetite for risk – and abide by it
• knowledge of book’s underlying statistics
• to understand each insured and its associated risks
Claims Handling
• Knowledgeable Claim Handlers
• Standardized Approach to Claims Reserving
• Consistent Approach to Claims Reserving
Effects of the Market Cycle
Hard Market and E&S
• Admitted Companies become more selective.
• Surplus Lines applications increase dramatically.
• Rates Firm, Coverages Contract.
• Small Decrease in Admitted Market can increase Non-Admitted Market Substantially.
Change in Applications(2000 Baseline = 100 units)
0
50
100
150
200
250
300
350
Products Med Mal
20002001200220032004
Soft Market and E&S
• Admitted Companies become less selective in their Underwriting.
• Fewer Risks are Declined.
• E&S companies develop new products to maintain volume.
Examples of New Products
• Employment Practices Liability
• Tenant Discrimination
• Environmental Impairment Liability
EPLI(1994 Baseline = 100 units)
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
1994 1996 1998 2000 2002 2004
E.P. (000)
New Product Development
1. Opportunity identification
2. Product design
3. Testing
4. Product introduction
5. Life-cycle management
Opportunity Identification
• Broker Recommendations
• Marketing
• New Product Teams
• Media
Product Design
• Target Market
• Coverages
• Policy Wording
• Rating
Testing
• Beta-Test on Select Market
• Honest Feedback
• Rate, rate, rate
Ratemaking Methods
Ratemaking Methods for New Products
• Pure Premium Methods
• Piggy-back Method
• Festus Method
Pure Premium Methods
1. Ultimate Losses / Ultimate Exposures
2. Frequency x Severity
Pure Premium Methods
1. Trend individual ‘ground-up’ losses; remove base deductible
2. Develop losses; cap at basic limit
3. Aggregate all adjusted losses.
Pure Premium MethodTreatment of Exposures
1. Multiply individual units of exposure by applicable relativity factors (state, class code, claims-made step-rate, etc.)
2. Aggregate all adjusted exposures
Pure Premium MethodCalculation of Rate
Pure Premium =
Aggregate Adjusted Losses
Aggregate Adjusted Exposures
Base Rate = Pure Premium
Permissible L/R
Pure Premium Method
• Works well for an existing product
• Works best for a product with a well-defined exposure base (doctors, employees)
• Requires detailed loss and exposure info (claim-by-claim, policy-by-policy)
• Actuarially sound
Piggy-back Method
1. Start with Comparable Product
2. Adjust Rates for Coverage differences
3. Adjust for Limits/Deductible differences
4. Adjust for Expense differences
5. Others?
Piggy-back Method
• Works well for Enhancement of Existing Product
• Requires knowledge of Comparable Product• Judgmental• Danger of being too
Conservative/Aggressive?• Difficult to Support to Others
The Festus Method
The Festus Method
Ratemaking Tools
• Imagination!
• Innovation!
• Intuition!
• Internet!
Useful Sites
• www.google.com – Big Brother is Watching!
• www.firstgov.gov - U.S. Government’s Official Web Portal
• www.bls.gov - Bureau of Labor Statistics
• www.federalreserve.gov - Interest Rates
Other Useful Websites
• www.cas.org
• www.cnn.com
• Where ever else the web may take you!