Milliman

Package Policy Reserving

Casualty Loss Reserve Seminar

Prepared by: Brian Z. Brown, FCAS, MAAA

Consulting Actuary

Milliman, Inc.

Monday – September 13, 2005

10:30 a.m. – 12:00 p.m.

2Milliman

Lack of Credibility Lack of Homogeneity Indivisible Premium Odd Exposures

Construction Defect Mold Products

State Differences Type of Risk

Package Policy Reserving Issues

3Milliman

Lack of Credibility

Need to use external sources LDFs

• ISO• Annual Statements• Others

Loss Ratios• Pricing Analysis• Competitors – Annual Statements• Older years adjusted to current rate and loss cost levels

Package Policy Reserving Issues

4Milliman

Lack of Homogeneity

Differences by type of risk Large versus small Deductible / non-deductible Products / non-products Construction defect exposure State Etc.

Package Policy Reserving Issues

5Milliman

Industry Statistics - CMP Loss ratio differences by type of Company

Package Policy Reserving Issues

CMPUltimate Loss and DCC Ratio

LargeAccident Personal Middle Commercial

Year Lines Market Insurers

1995 75.4% 69.1% 71.7%1996 73.8% 79.9% 80.2%1997 69.5% 66.6% 74.0%1998 78.6% 78.9% 91.8%1999 67.9% 77.7% 94.5%2000 73.0% 81.4% 86.6%2001 71.5% 77.1% 93.6%2002 60.8% 57.0% 59.3%2003 53.2% 55.3% 53.8%2004 69.9% 58.5% 68.7%

Total 68.6% 68.6% 76.0%

6Milliman

Industry Statistics Observations

1) Loss ratio variability increases with size of insurer.

2) Results more cycle-driven for larger insurers.

Package Policy Reserving Issues

7Milliman

Industry Statistics - CMP Total Reserves to Earned Premium by Type of

Company

Package Policy Reserving Issues

CMPReserves to Earned Premium

LargeAccident Personal Middle Commercial

Year Lines Market Insurers

1995 1.6% 1.7% 3.5%1996 2.1% 2.6% 4.5%1997 2.4% 3.7% 5.5%1998 3.5% 4.8% 9.1%1999 4.3% 8.6% 13.2%2000 6.3% 11.3% 17.6%2001 9.3% 14.9% 25.4%2002 13.1% 17.1% 24.1%2003 17.2% 22.1% 28.0%2004 37.9% 36.4% 51.9%

Total 11.5% 14.4% 19.9%

8Milliman

Reserves to Earned Premium Observations

Smaller insurers have lower reserves relative to premium – maybe related to higher percentage of property exposure and longer tailed general liability exposure

Some large insurers have significant IBNR relative to case

• Construction Defect• Products

Package Policy Reserving Issues

9Milliman

Package Policy Reserving Issues

CMPPayment Patterns by Size of Company

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

1 2 3 4 5 6 7 8 9 10

Years of Development

Per

cen

t P

aid

Personal Lines Middle-Market Large Commercial Insurers

10Milliman

Payout Pattern Observations

Larger insurers have slower payout patterns

Package Policy Reserving Issues

11Milliman

Observations Larger insurers results are more difficult to

project Higher loss ratio variability More IBNR needs Slower payout pattern More difficult exposures

Package Policy Reserving Issues

12Milliman

Indivisible Premium One premium charge frequently for property /

liability Analyze partial loss ratios

Property / Liability Further refinements

• Products / non-products

• Construction defect / non-construction defect

Package Policy Reserving Issues

13Milliman

Odd Exposures Construction Defect

Long tail Difficult to assign accident / policy year Additional insured exposure Significant legal A mess

Mold

Products

Package Policy Reserving Issues

14Milliman

State Differences

Package Policy Reserving Issues

Source: Annual Statement Statutory Exhibit of Premiums and Losses

CMPDirect Incurred Loss & DCC Ratio

Calendar Western Southern All OtherYear States States Excl. NY

1999 69.3% 71.7% 84.4%2000 80.2% 72.9% 69.7%2001 81.8% 73.3% 75.0%2002 78.3% 62.6% 56.3%2003 68.3% 59.4% 59.9%2004 56.8% 114.0% 52.4%

Total 71.5% 76.5% 64.6%

15Milliman

Loss Ratios

Package Policy Reserving Issues

Source: Annual Statement Statutory Exhibit of Premiums and Losses

CMPDirect Incurred Loss & DCC Ratio

CalendarYear Nevada

1999 117.7%2000 137.8%2001 132.3%2002 138.8%2003 108.3%2004 84.9%

Total 117.4%