1 CAS Emerging Issues Seminar April 15, 2002 Reserving for Unusual Catastrophes Dan Thomas,...

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CAS Emerging Issues SeminarApril 15, 2002

Reserving for Unusual Catastrophes

Dan Thomas, PricewaterhouseCoopersClaire Louis, PricewaterhouseCoopers

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Outline

• Individual company reserve estimate methodology

• Ongoing issues

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Individual Company Reserve Estimate Methodology

• Potential actuarial methods

• Methods used

• Underwriting methodology with assumptions

• Specific line of business considerations

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Individual Company Reserve Estimate MethodologyPotential Actuarial Methods

• CAT development factors

– Actual development history

– Problems applying to 9/11 losses

• Market share allocation

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Individual Company Reserve Estimate MethodologyMethods Used

• Insurers and reinsurers initially used exposure-based loss estimation method

• Loss estimation generally directed by underwriting with the assistance of claims and actuarial

• Companies did not anticipate a 9/11-type loss event

• Company exposure identification and management process reflected this: Most companies did not have such a process in place prior to 9/11.

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Individual Company Reserve Estimate MethodologyUnderwriting Methodology with Assumptions

• Intelligence gathering

• Intelligence vetting

• Exposure investigation

• Exposure estimation

• Loss reporting and analysis

• Loss reserving

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• Intelligence gathering – identifying the exposure– Market sources – Underwriting records– Knowledge of ceding company book of business,

underwriting practices and underlying insured operations

– Predictive models– Sufficiently iterative

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• Intelligence vetting – assessing the exposure information

– Source reliability

– System data integrity

– Human error

– Ceding company advices

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• Exposure identification– Primary exposure areas– Product lines– Contract types– Detailed contract or policy analysis – Contract wordings

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• Exposure estimation– Industry loss estimates– Market share– Large measure of uncertainty regarding extent of exposure– Reassess as new market information is received

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• Loss reporting and analysis– Expert retention– Industry steering committees– Coordinating counsel– Contract terms and conditions– Discrepancies in insurer policy and reinsurance contract terms and conditions

• Occurrence• Terrorism risk exclusion (some non-U.S. reinsurers)

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• Loss reserving – General philosophy– Provisions for uncertainty: portfolio versus transaction-based – IBNER (ACRs) v. bulk v.

IBNR– LAE– Volatility of ceding company or insured loss estimates– Intra-company consistency in reserving approach

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Individual Company Reserve Estimate MethodologySpecific Line of Business Considerations

• Property coverages

– Business interruption

– Extra expense

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• Business Interruption– Background – Threshold requirements

• Loss arising from a covered peril– Causation– Lost profits

• Interruption of insured’s business operations– “Necessary suspension of operations”: Sufficient

level of interruption– Physical damage may not be required for coverage to

attach

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• Business Interruption

– Coverage issues

• Replacement structure different from original structure

• Cost of rebuilding

• Period of restoration or recovery

– Time to restore versus time to improve

– Post-restoration period losses– Projected profits during period of restoration

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Pre-9/11 Post-9/11

Airlines Poor; losses expected for 3Q and for entire 2001; drop in business travel; GDP decline and traffic highly correlated; severe economic hardship

Grim; 40-50% decline in revenue for remainder of the year and 15-20% drop for first half of 2002.

Lodging Poor; 7-9% decline through August 2001; expect continued volatility

Grim; 20-40% short-term decline due to travel restrictions, fear to travel, worsening of the general U.S. economy; rising fuel costs

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• Business Interruption - Civil or military authority coverage

– Impairment of access to insured premises

– Physical loss or damage to property other than the insured premises

– Caused by or results from covered peril

– Some policies eliminate physical damage requirement

– Some policies exclude civil or military authority coverage

– Sub-limits

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• Business Interruption - Civil or military authority coverage

– Claims presented by airlines, airports, airport concessions, entertainment-related organizations, hotels, travel and tour companies, and transportation authorities (NY/NJ Port Authority)

– Ingress-egress

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• Business Interruption - other coverages

– Contingent business interruption

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• Extra Expense

– Necessary expenses that exceed normal operating costs to continue or minimize suspension of business operations

• Incurred during period of restoration

• Physical loss or damage required

• Sub-limits

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• Extra Expense - Categories

– Expenses incurred when insured shifts operation to other pre-existing locations

– Cost of renting temporary office space

– Terror prevention expenses; new WTC

– Advertising expenses: Cost of changing Web site, sales literature, and marketing

– Clean-up costs

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• Workers’ Compensation

– Background / definitions

– Post-traumatic stress syndrome (PTSD)

• Delayed response to stressor event: At least one month

– Occupational disease

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• Worker’s Compensation - PTSD– Five days post-event: 44% of Americans reported

substantial stress (Rand Institute)– Early October 2001: 25% of Americans reported being

worried or having difficulty sleeping (Pew Research Center)

– Some project a 20% rate of PTSD in work force within 1,000 feet of WTC at time of attack

– Risks of PTSD rise with age and history of trauma, decline with higher educational level and higher quality social and economic supports

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• Worker’s Compensation - PTSD

– Statutes or case law for many states excludes compensation for purely mental injury (mental-mental)

– In most states, less than 1% of total claims are purely mental (Worker’s Compensation Research Institute)

– Many states require accompanying physical injury (physical-mental)

– New York does not require physical injury

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• Worker’s Compensation - PTSD– Other PTSD compensation standards:

• Unusual and extraordinary stress• Sudden, unexpected, extraordinary event• Proximity to event• Work conditions caused the injury

– Employers offering psychological counseling– Few PTSD claims reported to insurers to date

• Reporting lag not unexpected given nature of PTSD (delayed response to stressor event)

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• Worker’s compensation – occupational disease

– Background / definitions

• NYS Worker’s Compensation Law

– 29 specific illnesses if contracted by persons working with certain toxic substances, including silicosis and other dust diseases, asbestosis, anthrax, lead, mercury and radium poisoning

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• Worker’s compensation – occupational disease

– Exposure to asbestos and other airborne pollutants from WTC recovery and clean-up

– Health complaints reported by 4,000 emergency response personnel working on WTC clean-up

– Respiratory ailments, neurological problems, cancer

– One-year statute of limitations begins when employee is disabled and begins to lose wages

– Potentially long latency period and reporting lag

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• Liability – potential coverages impacted

– General liability

• Airlines or airports for negligent security

• Building owners for negligent security and fire protection systems

– Professional liability – architects and engineers

• Negligent building design

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• Liability

– Industry losses difficult to estimate

– Limitation of Silverstein and airline liability for damages under federal Air Safety and System Stabilization Act

– Probability of subrogation

– Victims’ Compensation Fund

– Single venue for all lawsuits

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• Disability

– Employers required to provide under NYS law

– Provides income protection for non-employment-related injuries or sicknesses

– Does not pay for cost of medical care

– Manhattan workers, visitors, general public

– Mental and nerve-related claims, including PTSD

– Lung ailments, cancers

– Latency period

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• Health

– Non-work-related injuries

– Manhattan residents: Many children

– Manhattan visitors

– “WTC cough”, chronic sinus infections, acute lung trauma

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Ongoing Issues

• Summary of paid / incurred to date

• Company reserve revisions

• Potential WTC reserving issues

• Future terrorism-related reserving issues

• 9/11 Insurance and non-insurance dispute update

• Reserving “checklist”

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Ongoing Issues

Summary of paid / incurred to date

• Types of payments

• Gross / net gap

Company reserve revisions

• Number of revisions

• Reasons for revisions

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Ongoing Issues

• Potential WTC reserving issues

– Property


– Worker’s compensation / disability / health

• PTSD

• Respiratory and neurological ailments; cancers

– Liability

• General, products

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Ongoing Issues

• Future terrorism-related reserving issues

– U.S. and global risks

– Chemical, biological, radiological attacks

• Could affect large numbers of people

• Potentially affected coverages

– Property / business interruption

– Worker’s compensation

– General liability, professional liability, products liability

» Could give rise to mass tort and class actions

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Ongoing Issues

• Insurance response to terrorism exposures

– Shut-down from a bio-hoax

• Business interruption

– Anthrax clean-up

• Property

– Pollution or contamination exclusion

– Bio-attack in workplace

• Workers’ compensation

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Ongoing Issues

• Insurance response to terrorism exposures – Cont’d.

– Anthrax testing; cost of precautionary antibiotics related to suspected anthrax exposure

• Worker’s compensation

– Protection of employees and customers against potential terrorist attacks

• To date, lawsuits filed against U.S. Postal Service, physician, and hospital

• General liability

– Pollution exclusion

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Ongoing Issues

• 9/11 Insurance Dispute Update– Silverstein

• Total of 19 insurers, Swiss Re and others• Policies did not reference Willis policy: Source of

dispute on number of occurrences• 3rd September 2002 trial date

– Silverstein: ACE, XL• Referenced Willis policy: one occurrence, not two • Defines occurrence as “all losses or damages that

are attributable directly or indirectly to one cause or to one series of similar causes”

• Settled based on one occurrence

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Ongoing Issues

• 9/11 Insurance Dispute Update – Cont’d.

– Westfield

• Lawsuit with Zurich dismissed

• Dispute will be decided through arbitration

• Zurich policy supplements Silverstein cover

– Port Authority

• No lawsuit; ongoing negotiations with insurers

• Primary issue is number of occurrences

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Ongoing Issues

• 9/11 Insurance Dispute Update – Cont’d.

– Reinsurers are challenging ceding company property & business interruption claim payments, resulting in delays in reinsurer payments

– Increase in reinsurer/ceding company disputes

• “Follow the fortunes” does not always mean “follow the settlement”

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Ongoing Issues

• Non-Insurance Dispute-Related Issues

– 90-day deadline to give notice of claim; some notices received after 90 days may be accepted

– One year deadline to file suit

– 1,300 people have given notice may sue NYC for $7.8 billion for fear of cancer and ailments related to WTC cleanup and recovery

– Under NYS law, fire fighters not entitled to worker’s compensation

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Ongoing Issues

• Non-Insurance Dispute-Related Issues – Cont’d.

– Property owners near WTC have also given notice they may file suit against NYC

– As of 1/2002 (following expiration of 90-day deadline), the Port Authority had received 87 notices of claim

– Suit filed on behalf of relatives of six airline passengers who died on 9/11: American Airlines, United Airlines, security firms at Logan, Newark, and Portland, ME, airports

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Ongoing Issues

• Reserving “checklist”

– Liability estimation

– Solvency considerations

– Ongoing business considerations

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Ongoing IssuesChecklist – Liability Estimation

• Statement of Opinion considerations

– Reinsurance Collectibility

– Applicability of financial reinsurance

– Impact on RBC or IRIS tests

– Type of opinion

– Changes in reserving methods and assumptions

– List of major risk factors

– Potential for material adverse deviation

– Materiality

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Ongoing IssuesChecklist – Liability Estimation

• Other considerations

– Booked reserve issues

– Personnel and methods used

– Uncollectible reinsurance

– Loss versus LAE

– Procedural changes in company

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Ongoing IssuesChecklist -- Solvency Considerations

• Cash flow

• Asset management

• Present to the outside world

• Reserve range uncertainty

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Ongoing IssuesChecklist -- Ongoing Business Considerations

• Reinsurance scenarios

• Policy and underwriting changes

• Changes in direction of company

1 CAS Emerging Issues Seminar April 15, 2002 Reserving for Unusual Catastrophes Dan Thomas,...

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