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www.guycarp.com
Severity Exposed -
October 2010
www.guycarp.com
Severity Exposed - Putting the jacket back on
October 2010
3Guy Carpenter
Instant vs Homemade – Single Claimant Severity
Severity can arrive a couple of different ways, kind of like oatmeal
– Instant in the form of a serious catastrophic claim – Burns / Brains– Homemade / slow cooked via deterioration of reserves and
additional health problems of injured workers “in the system”– Unlike oatmeal, unforeseen severity to a portfolio can be unhealthy
A long-term, broad market view of losses will provide some severity indicators
AASCIF provides a great environment for non-competing companies to exchange data, experience and strategies to identify and attempt to mitigate severity volatility
Intermediary and Consultant have tools to help to reveal severity volatility
4Guy Carpenter
Guy CarpenterSeverity Indicator / Portfolio Management Tool - Reveal™
Others may have similar tools. Some of you may have created your own severity tool / index
Reveal™, by Guy Carpenter was created to provide a refined, class code level look at severity beyond Hazard Groupings– What was originally a four tiered system is now seven tiered
system – better but still contains some gaps– Computer power and actuarial science have been combined to
produce a more refined view of severity
Created with industry data by state
For class codes without the volume to produce credibility, algorithms were created using other state and/or similar class code experience
5Guy Carpenter
Plotting the Class CodesRelative Frequency by Class Code
• Individual Class Codes
Lower than
Hazard Group
Higher than
Hazard Group
A point plotted near “1” represents a class code that has historically had an “average” number of observed Permanent Total claims, compared to the Hazard Group average. A point significantly above or below has had a disproportionate number of PT claims, compared to the class’s HG average.
0.1
1
10
These Class Codes have a higher relative frequency of 5-7 times the hazard group
Ratio of Permanent Total Claims to Temporary Total Claims
6Guy Carpenter
Guy CarpenterSeverity Indicator / Portfolio Management Tool - Reveal™
Both ceding companies and reinsurers tend to rely on Hazard Groups for their severity indicators.– With severity driven class code data on your side you can refine….
…Underwriting / Loss Control / Claims handling to address severity classes
…/enhance chances of profitability when reviewing growth initiatives
…(change) reinsurer opinions of severity within a portfolio, reduce reinsurance pricing
…indentify pockets of exposure, policies which may warrant strategic reinsurance purchasing (facultative reinsurance)
Using Reinsurance to Mitigate Severity Volatility -
8Guy Carpenter
Reinsurance as a backstopSingle Claimant vs Multiple Claimant losses
Lots of “two’s” in the reinsurance discussion today– Two types of reinsurance Treaty and Facultative
Treaty – reinsurance to cover a portfolio of policies Facultative – reinsurance to cover losses from a single policy*
– Two forms of reinsurance Pro-Rata and Excess of Loss Pro-rata – first dollar sharing of premium and losses Excess of Loss – reinsurance pays once a deductible has been
exceeded– Two forms of Excess of Loss reinsurance
Multiple claimant coverage – industrial accident, natural perils, terrorism. Also called Catastrophe reinsurance
Single claimant coverage – also called working layer
9Guy Carpenter
Reinsurance as a backstopSingle Claimant vs Multiple Claimant losses
Multiple Claimant (Catastrophe) Reinsurance
Several products, ample reinsurance capacity and price flexibility for multi-claimant, Catastrophe reinsurance.– Steady price decreases 2003– Third-party catastrophe models for earthquake and terrorism create
common ground for evaluating loss possibilities Price is market driven by the market’s cost of capital to cover
limits offered – Terms and Conditions typically allow for loss from a single claimant
of up to $10M. More is available, but at a price
10Guy Carpenter
Reinsurance as a backstopSingle Claimant Coverage
Single Claimant severity exposure is typically mitigated with Working layer reinsurance coverage.
Two typical tranches (if purchased)– Single claimant coverage in layers up to $5M per occurrence– Single claimant losses between $5M and $10M– Very few buy reinsurance excess of $10M although there is
capacity available. (watch this space !)
Strength of Ceding company balance sheet, Hazard Group mix, historical losses and risk appetite of Executives and Board usually factor into the decision for working layers structures.
Instant severity and developed (homemade) severity volatility can be covered by the same structures
11Guy Carpenter
Reinsurance as a backstopSingle Claimant Coverage
Typical terms and conditions for a working layer providing single claimant coverage– Per Occurrence – determined by the date of loss– Typically a fixed aggregate limits either…
…purchased in advance …limited by a number of reinstatements, which may result in
some additional premium– Usually a sunset provision of seven or ten years
Requires that a claim be reported to reinsurers within the sunset date.
– Limits to $10M available
As a part of an overall Enterprise Risk Management strategy, conservative accident year strategies create good calendar year strategies.
12Guy Carpenter
Reinsurance as a backstopSingle Claimant Coverage – higher limits
More inquiries from clients for limits greater than $10M
Tough to find middle ground for ceding companies and reinsurers
Possible strategies– Pooling of risk by more than one company to purchase reinsurance– Multi-year agreements for reduced annual limits – Change layering. Update current $5M xs $5M layers to $10M xs
$5M– Modify the multi-claimant catastrophe coverages to allow for a
single claimant loss greater than $10M (which is typically the cap)
Intermediaries and reinsurers can provide a valuable view of the risk (and mitigating structures) to complement a company’s internal view of the risk of severity volatility
13Guy Carpenter
Closing
Additional client stories
– 15+ year client – One historical loss greater than $5M. Within three weeks in 2010, one claim $9M one claim $6M. Both single claimant losses
– We have a client with a single claimant incurred loss greater than $30M.
Few believe a company can eliminate the possibility of severity loss volatility. However, there are tools and strategies which can reduce dependency on “good luck”
www.guycarp.com
Questions / Discussion
Aaron Bueler, Workers Compensation Specialty Practice Leader, Managing Director – Guy Carpenter, Seattle
Jason Denechaud, Director of Accident, Health & Workers Compensation Underwriting, Catlin US
www.guycarp.com
www.guycarp.com
Severity Exposed - Putting the jacket back on
October 2010
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