hurricane loss reserving presentation by joseph boor, fcas 2006 clrs september 13, 2006

Hurricane Loss ReservingHurricane Loss Reserving

Presentation by Joseph Boor, FCASPresentation by Joseph Boor, FCAS

2006 CLRS2006 CLRS

September 13, 2006September 13, 2006


Notable Recent HurricanesNotable Recent Hurricanes– 2004 Florida hit by 4 hurricanes2004 Florida hit by 4 hurricanes– 2005 2005

Katrina Hits Alabama-Louisiana CoastKatrina Hits Alabama-Louisiana Coast– New OrleansNew Orleans

Florida hit by twoFlorida hit by two– Dennis – PanhandleDennis – Panhandle– Wilma – Unsung major stormWilma – Unsung major storm


AftermathsAftermaths– 2005 2005

Major reserve adjustments for some Major reserve adjustments for some Florida homeowners specialistsFlorida homeowners specialists

– 2006 2006 Insolvency of Poe companies in FloridaInsolvency of Poe companies in Florida Continuing litigation over wind vs. flood Continuing litigation over wind vs. flood

damage post Katrinadamage post Katrina Rebuilding issues in New Orleans Rebuilding issues in New Orleans


Major Actuarial IssuesMajor Actuarial Issues– Some new cos/new (to storms) Some new cos/new (to storms)

actuariesactuaries Not sure how to address hurricanes in Not sure how to address hurricanes in

reserving reserving – Will discuss issues laterWill discuss issues later

– Coverage Issues Create Contingent Coverage Issues Create Contingent Liabilities?Liabilities? Outside scope of this talkOutside scope of this talk


Technical Actuarial IssuesTechnical Actuarial Issues– Large number of claims on one Large number of claims on one

accident dateaccident date Distorts accident year patternDistorts accident year pattern

– Processing lags induced by high Processing lags induced by high claims volumeclaims volume

– Potential for higher severities Potential for higher severities – Complex reinsurance programs Complex reinsurance programs

applicableapplicable


Widely available informationWidely available information– RAA Catastrophe development RAA Catastrophe development

patternspatterns But, at least part of this is direct, not But, at least part of this is direct, not

netnet

– Possibly other similar dataPossibly other similar data– In a phrase, slim pickings.In a phrase, slim pickings.


Response of actuariesResponse of actuaries– Large CosLarge Cos

Have data on prior storms & use it.Have data on prior storms & use it.

– Small Cos (& their consultants)Small Cos (& their consultants) Varies by personVaries by person Some instances of actuaries accepting Some instances of actuaries accepting

co numbers at face valueco numbers at face value


What can the small co actuary What can the small co actuary do?do?– Want to present a methodWant to present a method

No reliance on external dataNo reliance on external data Possible for one or two actuaries to Possible for one or two actuaries to

execute using personal computersexecute using personal computers– Have done it myself using Have done it myself using

outdated state government personal outdated state government personal computers and computers and

Circa 2000 Microsoft Office software Circa 2000 Microsoft Office software


Basic ConceptsBasic Concepts– Develop the direct loss for each Develop the direct loss for each

stormstorm Use 2004 data to make LDFs for 2005 Use 2004 data to make LDFs for 2005

storms, etc.storms, etc. Use techniques that solve the special Use techniques that solve the special

problemsproblems

– Then, reflect reinsurance programThen, reflect reinsurance program


Direct Loss Reserving IssuesDirect Loss Reserving Issues1.1. All the storm’s claims share a single All the storm’s claims share a single

accident dateaccident date– June storm needs different 12/31 LDF than June storm needs different 12/31 LDF than

November stormNovember storm Different severity than other claims as wellDifferent severity than other claims as well

2.2. Different severities between storms? Different severities between storms?

3.3. Potential for payment/reserving lags due Potential for payment/reserving lags due to heavy claims volume to heavy claims volume

4.4. Possibility that lags differ storm to stormPossibility that lags differ storm to storm


How to solve the problems How to solve the problems No. 1 - All the storm’s claims No. 1 - All the storm’s claims

share a single accident dateshare a single accident date Begin by analyzing data grouped Begin by analyzing data grouped

by hurricaneby hurricane– Period of development is month (or Period of development is month (or

week) since the hurricane week) since the hurricane occurrence date.occurrence date.


Analyzing data for each hurricaneAnalyzing data for each hurricane– This may initially create a data This may initially create a data

processing problem (identifying the processing problem (identifying the claims for each storm) claims for each storm) but using accident date it is usually not but using accident date it is usually not

too hard to get a list of the claim too hard to get a list of the claim numbers for each storm- computer data numbers for each storm- computer data crunching can then do the rest crunching can then do the rest

Co. may store PCS cat number in claim Co. may store PCS cat number in claim master filemaster file


Analyzing data grouped by hurricaneAnalyzing data grouped by hurricane What to analyze? – dollar data What to analyze? – dollar data

elementselements– Paid loss (&DCC)Paid loss (&DCC)– Paid outside adjuster costsPaid outside adjuster costs– Incurred loss (&DCC)Incurred loss (&DCC)– Incurred outside adjuster costsIncurred outside adjuster costs


Analyzing data grouped by hurricaneAnalyzing data grouped by hurricane What else to analyze? – count data What else to analyze? – count data

elementselements– Number of closings (number of times Number of closings (number of times

any claim has been closed-set to zero any claim has been closed-set to zero reservereserve

– Number of claims reportedNumber of claims reported– Number of reopeningsNumber of reopenings– Similar data for the AOE portionSimilar data for the AOE portion


Solving the single occurrence Solving the single occurrence date problemdate problem

Data laid out in last two slides Data laid out in last two slides solves the problemsolves the problem

Paid loss development, etc. is no Paid loss development, etc. is no longer a trianglelonger a triangle


Loss development, whatever sort, Loss development, whatever sort, is no longer based on a triangleis no longer based on a triangle– Series of lines across the page-one Series of lines across the page-one

for each hurricanefor each hurricane– I organize alphabetically by storm I organize alphabetically by storm

namename May have short line (for recent storm) in May have short line (for recent storm) in

the middle of long linesthe middle of long lines


Example of Example of Hurricane Hurricane development development ‘lines’‘lines’

Type: Paid Loss Mos Sample Co.

Hurricane 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Charley $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X

Dennis $X $X $X $X $X $X $X $X

Frances $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X

Ivan $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X $X

Katrina $X $X $X $X $X $X $X

Wilma $X $X $X $X $X


Keys to understanding hurricane Keys to understanding hurricane developmentdevelopment– Not all hurricanes are alikeNot all hurricanes are alike

For the most part, Rita was weak and For the most part, Rita was weak and had ‘smallish’ claimshad ‘smallish’ claims

In it’s target areas, Wilma was strong In it’s target areas, Wilma was strong and generated more expensive claimsand generated more expensive claims


Reserving problem 2 -difference in Reserving problem 2 -difference in claim severities between storms.claim severities between storms.– One dubious benefit of having four One dubious benefit of having four

storms in 04 is that had 4 very different storms in 04 is that had 4 very different storms w/ very different claim sizes.storms w/ very different claim sizes.

– Can compare the paid per closed claim Can compare the paid per closed claim on those at maturities matching Rita on those at maturities matching Rita and Wilma’s 12/05 maturitiesand Wilma’s 12/05 maturities


Reserving problems 3 and 4 -Reserving problems 3 and 4 -Payment/reserving lags and Payment/reserving lags and Differences in lags between stormsDifferences in lags between storms

– For most carriers, since Wilma was big For most carriers, since Wilma was big and Rita was small, Wilma generated and Rita was small, Wilma generated significantly more processing lag than significantly more processing lag than Rita.Rita.

– Measure this by reporting pattern of Measure this by reporting pattern of claims and % closed by dev. month.claims and % closed by dev. month.


Keys to understanding hurricane Keys to understanding hurricane developmentdevelopment– Experience w/some carriers is that Experience w/some carriers is that

many claims reopenmany claims reopen– In 2004, often too manyIn 2004, often too many


Dealing with ReopeningsDealing with Reopenings– Have to not just compare % closed Have to not just compare % closed

to reported for prior storms at to reported for prior storms at matching maturies-have to compare matching maturies-have to compare the % of previously closed that have the % of previously closed that have since reopened.since reopened.

– No specific formulaNo specific formula Seek best assessment from dataSeek best assessment from data


Florida-Specific??? Issue – Heavy Florida-Specific??? Issue – Heavy Reopenings in 2004.Reopenings in 2004.– Some companies experienced Some companies experienced

demand surge/other factors so much demand surge/other factors so much that their initial closing payments that their initial closing payments might be woefully inadequate to fix might be woefully inadequate to fix houses- result – massive reopenings.houses- result – massive reopenings.

– Would it happen with 2005 claims?Would it happen with 2005 claims?


Analyzing chance of 05 storm Analyzing chance of 05 storm reopenings.reopenings.– Key statistic to review- Key statistic to review-

#reopenings/#claims closed for #reopenings/#claims closed for Wilma (at 2 months) vs. major 04 Wilma (at 2 months) vs. major 04 storms at 3 months maturity.storms at 3 months maturity.


Reopening DataReopening Data– By-product of the calendar month By-product of the calendar month

processing approach we used was the processing approach we used was the number of reopenings and claim number of reopenings and claim closings in each monthclosings in each month

– Closing - any day a claim has $$ Closing - any day a claim has $$ activity and ends with a zero reserve.activity and ends with a zero reserve.

– Reopening – any time a claim starts Reopening – any time a claim starts the day w/a zero reserve but has $$ the day w/a zero reserve but has $$ activity.activity.


Issues w/ Reopening DataIssues w/ Reopening Data– A claim that has a supplemental A claim that has a supplemental

single (unreserved) payment made single (unreserved) payment made after closing generates a reopening after closing generates a reopening and a closing on the same day.and a closing on the same day.

– But, it’s objective. But, it’s objective.


Formulas for key closing and Formulas for key closing and reopening statisticsreopening statistics– Closed claims at date x = #closings Closed claims at date x = #closings

through x - #reopenings through xthrough x - #reopenings through x– Most key reopening statistic = Most key reopening statistic =

#reopenings through x/#closed #reopenings through x/#closed through xthrough x


Synthesis of development Synthesis of development approaches using prior hurricane approaches using prior hurricane datadata– Look for prior-developing hurricane Look for prior-developing hurricane

that has best fitthat has best fit Consider, size, reopenings, etc. to Consider, size, reopenings, etc. to

determine best fitdetermine best fit

– Consider using LDF based on that Consider using LDF based on that hurricane’s data.hurricane’s data.


Direct Loss development – Direct Loss development – footnotesfootnotes– All the issues with loss development All the issues with loss development

(tail development, picking links from (tail development, picking links from data, etc.) apply.data, etc.) apply.

– May use alternate method – Average May use alternate method – Average unpaid loss per unclosed claim or unpaid loss per unclosed claim or average unpaid loss per future average unpaid loss per future closing – or others.closing – or others.


How did we create the data?How did we create the data?– We got extracts of each company’s We got extracts of each company’s

claims master file and claims claims master file and claims transaction file and processed using transaction file and processed using Microsoft Access 2000 (computers Microsoft Access 2000 (computers obsolete as well) and created dataobsolete as well) and created data

– Had over $1 billion in ultimate lossHad over $1 billion in ultimate loss


Can you create the data?Can you create the data?– Talked to very, very, large Florida Talked to very, very, large Florida

writerwriter They do similar things with modern They do similar things with modern

Access and modern computers.Access and modern computers.

– You very likely have the processing You very likely have the processing power to this for your company(s)power to this for your company(s)

– Access has a few quirks, but we did Access has a few quirks, but we did this with pretty limited expertise.this with pretty limited expertise.


Do you know what data files to Do you know what data files to ask for?ask for?– Too much to discuss here.Too much to discuss here.– Bottom line - We got what we Bottom line - We got what we

needed even though the company(s) needed even though the company(s) had to process it a little to get what had to process it a little to get what we thought was on the master and we thought was on the master and transaction files.transaction files.


Have done direct-but why bother Have done direct-but why bother with direct and ceded to get net?with direct and ceded to get net?– Why not just triangulate net?Why not just triangulate net?


As we’ll see, most Florida As we’ll see, most Florida companies have extensive excess-companies have extensive excess-of-loss reinsurance that attaches of-loss reinsurance that attaches on even modest hurricaneson even modest hurricanes– Once it attaches, development is Once it attaches, development is

either slowed significantly (‘open either slowed significantly (‘open sliver’) or halted (full coverage)sliver’) or halted (full coverage)

– If it becomes exhausted, If it becomes exhausted, development may begin again in development may begin again in earnest.earnest.


Direct to NetDirect to Net– The skinny is-you need to estimate The skinny is-you need to estimate

the direct and then apply the the direct and then apply the reinsurance to get to the net.reinsurance to get to the net.

– If you’re near to a limit on coverage, If you’re near to a limit on coverage, might be worth stating as a risk of might be worth stating as a risk of material averse deviation.material averse deviation.


Next Issue – Getting to Net – Next Issue – Getting to Net – Applying the Reinsurance Applying the Reinsurance Program.Program.


Applying the Reinsurance ProgramApplying the Reinsurance Program– Most important aspect of applying the Most important aspect of applying the

reinsurance program is reinsurance program is understandingunderstanding how the program works.how the program works.

– I audit some insurance companies that I audit some insurance companies that actually have a great reinsurance actually have a great reinsurance program- but have great difficulty program- but have great difficulty describing how the different pieces work.describing how the different pieces work.


Key Features of Most Small Key Features of Most Small Company Reinsurance ProgramsCompany Reinsurance Programs– Quota ShareQuota Share– First Layer ExcessFirst Layer Excess– Florida Hurricane Catastrophe Fund Florida Hurricane Catastrophe Fund

(FHCF)(FHCF)– High Excess (Beyond Cat Fund)High Excess (Beyond Cat Fund)


Other Common TreatiesOther Common Treaties– ‘‘Sliver’ or ‘Market Excess’ Beside Cat Sliver’ or ‘Market Excess’ Beside Cat

FundFund– Per Risk ExcessPer Risk Excess


How the structure works – Quota ShareHow the structure works – Quota Share– Since company is a small, growing company, Since company is a small, growing company,

workhorse of the program is quota share workhorse of the program is quota share treatytreaty

– Quota Share will pay x% of all loss and DCC Quota Share will pay x% of all loss and DCC (if through a separate company, often AOE (if through a separate company, often AOE as well)- as well)- Subject to recovery caps per Subject to recovery caps per occurrence and per treaty yearoccurrence and per treaty year

– the % covered usually applies to losses the % covered usually applies to losses netnet of the cat fund – and maybe net of some of the cat fund – and maybe net of some other excess treaties.other excess treaties.


How the structure works – Cat FundHow the structure works – Cat Fund– Florida only feature – covers only Florida Florida only feature – covers only Florida

losseslosses– Covers 90% of Covers 90% of loss onlyloss only excess of a per- excess of a per-

hurricane retention(applicable to loss hurricane retention(applicable to loss only), with max recovery per hurricane.only), with max recovery per hurricane.

– Also, adds 5% of loss recovery for LAEAlso, adds 5% of loss recovery for LAE Effectively covers 94.5%= 1.05*90% of loss Effectively covers 94.5%= 1.05*90% of loss

only between retention and limit.only between retention and limit.


Digression – a few cat fund detailsDigression – a few cat fund details– Statewide retention and limit multipliers Statewide retention and limit multipliers

common to all carrierscommon to all carriers– These are multiplied by each carrier’s These are multiplied by each carrier’s

May- April premiumMay- April premium– Premium Based on early in period (June Premium Based on early in period (June

1?) inforce exposure times cat fund rates 1?) inforce exposure times cat fund rates by exposure typeby exposure type

– Can look up common retention and limit Can look up common retention and limit multipliers + company premiums on cat multipliers + company premiums on cat fund websitefund website


How the structure works – First How the structure works – First Layer ExcessLayer Excess– Has retention lower than cat fundHas retention lower than cat fund– retention and limit usually based on retention and limit usually based on

loss and LAE, not just lossloss and LAE, not just loss– Why first layer excess? Why first layer excess?

Usually, cat fund retention represents Usually, cat fund retention represents too much risk in relation to cos’ surplus.too much risk in relation to cos’ surplus.


How the structure works – High ExcessHow the structure works – High Excess– Usually attaches once cat fund exhaustedUsually attaches once cat fund exhausted

If loss only, would attach at cat fund retention If loss only, would attach at cat fund retention +100*limit/94.5.+100*limit/94.5.

– attachment and limit usually based on loss attachment and limit usually based on loss and LAE, not just lossand LAE, not just loss

May yield complex calculation for attachmentMay yield complex calculation for attachment

– Why high excess? Why high excess? Typically, cat fund does not supply enough limit Typically, cat fund does not supply enough limit

for all potential storms- cos need more limit.for all potential storms- cos need more limit.

– May have a tower of several high excess May have a tower of several high excess layerslayers


How the structure works – ‘Sliver’ or How the structure works – ‘Sliver’ or ‘Market’ Covers‘Market’ Covers– Illustrate by exampleIllustrate by example– If have If have

quota share of 50% (cat fund inuring) quota share of 50% (cat fund inuring) cat fund retention of 100Mcat fund retention of 100M a 300M loss+$21M LAE,a 300M loss+$21M LAE,

– then the company suffers a $100M loss then the company suffers a $100M loss (+LAE in 1(+LAE in 1stst $100M layer of $7Mish) $100M layer of $7Mish) up to up to the cat fund retentionthe cat fund retention

– quota share reduces the net loss and LAE quota share reduces the net loss and LAE ((up to cat fund retentionup to cat fund retention) to $53.5M) to $53.5M


Sliver Cover Illustration ContinuedSliver Cover Illustration Continued– Cat fund covers 94.5% of $200M Cat fund covers 94.5% of $200M

= $189M recovery from cat fund= $189M recovery from cat fund the remaining $11M +$14M LAE = $25M is the remaining $11M +$14M LAE = $25M is

unreinsured by the cat fundunreinsured by the cat fund quota share reduces this to $12.5Mquota share reduces this to $12.5M

– Sliver cover would attach at ‘around’ the cat fund Sliver cover would attach at ‘around’ the cat fund attachment, attachment,

would cover the portion left after the cat fund and the would cover the portion left after the cat fund and the quota sharequota share

– especially the LAE.especially the LAE. Usually, would max at at around cat fund loss max Usually, would max at at around cat fund loss max

(retention +(1/.945)*limit)(retention +(1/.945)*limit)– Since it covers small %, but acts over the broad Since it covers small %, but acts over the broad

range of loss cat fund covers, it is ‘skinny’ & hence is range of loss cat fund covers, it is ‘skinny’ & hence is a ‘sliver’.a ‘sliver’.


How the structure works – Per Risk How the structure works – Per Risk ExcessExcess– Covers the excess of the attachment on an Covers the excess of the attachment on an

individual propertyindividual property– attachment selected in advance applies to attachment selected in advance applies to

all locations covered.all locations covered.– This often applies before (inures to the This often applies before (inures to the

benefit of) all other reinsurance.benefit of) all other reinsurance.– As yet, not found to be a significant factor As yet, not found to be a significant factor

in hurricane reservingin hurricane reserving


Applying the Reinsurance Applying the Reinsurance Program to Direct Loss and LAEProgram to Direct Loss and LAE– Hardest thing often getting a clear Hardest thing often getting a clear

description of the programdescription of the program attachments of each componentattachments of each component

– On loss only or loss +LAE basis?On loss only or loss +LAE basis? % of loss (or loss+LAE?) component % of loss (or loss+LAE?) component

coverscovers Limits on coverageLimits on coverage


Limits on coverage you may seeLimits on coverage you may see– per occurrence limitper occurrence limit

Excess layers have this naturally, quota share Excess layers have this naturally, quota share often does as welloften does as well

– limit on reinstatementslimit on reinstatements And were they purchased?And were they purchased?

– aggregate limit on recoveriesaggregate limit on recoveries quota share-as % of premiumquota share-as % of premium Excess layers may have in lieu of reinstatementsExcess layers may have in lieu of reinstatements

– loss only vs. loss and LAEloss only vs. loss and LAE


Limits ContinuedLimits Continued– In some treaties (noted in quota In some treaties (noted in quota

shares), how the limit is calculated shares), how the limit is calculated may be a little ambiguousmay be a little ambiguous Be sure you understand whether or not Be sure you understand whether or not

any issues are there.any issues are there.


Unfinished issue - attachments of each Unfinished issue - attachments of each componentcomponent– Particular issue with cat fundParticular issue with cat fund

Underlying first layer excess, sliver cover, and Underlying first layer excess, sliver cover, and high excess programs all cover loss +LAE, high excess programs all cover loss +LAE,

– but must coordinate attachments/limits with cat but must coordinate attachments/limits with cat fund based on fund based on loss onlyloss only

Cat fund retention and limit not yet known (pre-Cat fund retention and limit not yet known (pre-June 1) when surrounding covers placed.June 1) when surrounding covers placed.

– This leads to complex method of computing This leads to complex method of computing retentions and limits for other treatiesretentions and limits for other treaties

Good to check it is applied correctly.Good to check it is applied correctly.


Understanding how the structure Understanding how the structure works – What comes first?works – What comes first?– The last part of understanding the The last part of understanding the

structure is understanding what structure is understanding what other treaties are to be looked to other treaties are to be looked to before each treaty’s loss is before each treaty’s loss is computed...e.g., what treaties ‘inure computed...e.g., what treaties ‘inure to the benefit of’ what other to the benefit of’ what other treaties?treaties?


How treaties applyHow treaties apply– Per risk excess inures to the benefit Per risk excess inures to the benefit

of everything elseof everything else– cat fund usually comes nextcat fund usually comes next– high excess, first layer excess, and high excess, first layer excess, and

quota share may have all kinds of quota share may have all kinds of relationships with each other and relationships with each other and cat fund in Floridacat fund in Florida You need to just figure out what applies You need to just figure out what applies

in your case.in your case.


Applying the reinsuranceApplying the reinsurance– At this point, At this point,

understand how the reinsurance program understand how the reinsurance program appliesapplies

understand how the limits, attachments, and understand how the limits, attachments, and order of applying treaties is set uporder of applying treaties is set up

In Florida-suggest looking for any program In Florida-suggest looking for any program changes since last year changes since last year

– Matter of taking Matter of taking estimated direct loss and LAE and run through estimated direct loss and LAE and run through

the programthe program less paid loss and LAE run through the program.less paid loss and LAE run through the program.


ConclusionsConclusions– First, thank you for comingFirst, thank you for coming– Next, with planning, you can do this Next, with planning, you can do this

and and do it welldo it well..

hurricane loss reserving presentation by joseph boor, fcas 2006 clrs september 13, 2006

Documents

storms claims

data processing problem

storm computer data

prior storms

hurricane occurrence

high claims volumepotential

single accident datejune

single accident datebegin