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Salzmann Procedure to Price Reinsurance
- 1. Calculate retention as a percent of Coverage A limits
- 2. Calculate retention + limit as a percent of Coverage A limits
- 3. Lookup up values in Cumulative Loss Cost Distribution table
- 4. Take diff erence of values in step 3 to get Exposure Factor
- 5. Exposure Premium = Exposure * Direct Premium
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Ludwig's Proposed Rating Methodology
- 1. Calculate weights for each cause of loss from historical data
- 2. Calculate the exposure rate for fi re, wind, and all other
- 3. Calculate total exposure rate using steps 1 and 2
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Advantage of Ludwig's Methodology over Salzmann Tables
- 1. Explicitly recognizes that all causes of loss need to be considered
- 2. Recognizes that each cause of loss has its own unique loss distribution
- 3. By considering all HO property coverages, revised tables directly applicable to rating property excess of loss
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Problems with Exposure Rating Commercial Property
- 1. Multiple locations
- 2. Coverages provided are not standard across all commercial property policies
- 3. No direct relationship between building limit and contents
- 4. Not a homogeneous set of exposures like homeowners
- 5. Range of insured values much greater than homeowners
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Improvements Made By Ludwig
- 1. Provides up to date size-of-loss distributions
- 2. Considers damages besides property losses
- 3. Considers perils in addition to fi re
- 4. Constructs size-of-loss distributions for commercial property risks
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3 Difficulties in Pricing Excess of Loss Reinsurance Treaties
- 1. Unexpected asbestos and pollution claims
- 2. Low loss frequency in high layers
- 3. Reinsurer may not know mix of property business written by the primary carrier
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3 Techniques to Price Excess of Loss Reinsurance Treaties
- 1. Experience Rating
- 2. Using expected loss distributions (curve fitting)
- 3. Exposure rating
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3 Problems with Experience Rating to Price Excess of Loss Reinsurance
- 1. Credibility: little historical experience for high reinsurance layers
- 2. Information: historical losses needed below present retention if trended value would exceed retention
- 3. Changes in Mix of Business: experience rating presumes that hazards have not changed signi ficantly
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2 Problems with Using Expected Loss Distributions to Price Excess of Loss Reinsurance Treaties
- 1. Subjectivity - selecting curve that models loss process
- 2. Complexity - explaining rate derivation to underwriter is complex
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Variables A ffecting Exposure Rating Procedures
- 1. Size of risk
- 2. Deductibles
- 3. Peril
- 4. Jurisdiction
- 5. Information
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8 Principles of Exposure Rating
- 1. Size-of-loss distributions for homogeneous HO book can be stated in terms of % of insured values
- 2. Less homogeneity among risks produces greater diff erences in loss distributions stated in %'s
- 3. Higher deductibles decrease subject premium and increase excess rates
- 4. Relative rates by peril for per-risk XOL and catastrophe XOL are different
- 5. Claim frequency greatly aff ects primary rates
- 6. Reinsurers rarely have all information needed for ideal exposure rating
- 7. Amount of insurance not limit for size of claim - need to include contents, loss of use
- 8. For small commercial property risks, rst-loss scales vary by classi fication and occupancy
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