New Products – The Intersection of Pricing,

Reserving, PlanningBetsy DePaolo

Vice President & Actuary, Personal Insurance

Travelers Insurance

Casualty Loss Reserve Seminar

September 11, 2007

Pricing a New Product

Many different ways to price a new product High Level Overview:

New Variables- Determine factors (multivariate analysis)- Determine base rates- Consideration of competition, disruption in marketplace, regulatory

New Underwriting Guidelines- Determine impacts of changes in mix

Will product be New Business Only or Conversion?- Conversion – determine disruption on current book

Calculate / Approximate the adequacy of filed rates Compare to current book of business

Determine Expected Loss Ratio as starting point

New Product Rolls Out – Now What?

Business team needs metrics to determine how product is doing Adequacy of pricing Reserving ultimates for financial reporting Planning / Forecasting

- Expected experience in future years

New Product Rolls Out – Now What?

Use Expected Loss Ratio from pricing analysis as initial “best guess” As losses begin to be reported, watch out for:

Distortions in Loss Development- Average Accident Date is not at midpoint of time period- Distorts in times of extreme growth or decline

“Large” Losses Seasonality Comparisons to current book of business Changes in Mix

- State distribution- Type of insured

Loss Development Distortions

Shift in Average Accident Date as product rolls out

Earned Premium by Quarter (000's)Quarter 1 Quarter 2 Quarter 3 Quarter 4

Old Product 3,499 3,450 3,360 3,240 3,140 3,000 2,900 2,850 2,650 2,550 2,400 2,300New Product 1 50 140 260 360 500 600 650 850 950 1,100 1,200Total 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500

Avg Acc Age (days) 75 45 15 75 45 15 75 45 15 75 45 15

Quarterly Average Accident DateOld Product 45.4 45.8 45.9 46.0New Product 23.2 38.6 41.4 42.7Total 45.0 45.0 45.0 45.0

Loss Development Distortions

Steady State Environment

1 2 3 4 5 6 7 8 9 10 11 12Earned Premium (000's) 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500

Reported 1 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Loss Ratio 2 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60%By Age 3 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%

4 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%5 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%6 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%

Reported 1 700 700 700 700 700 700 700 700 700 700 700 700 Losses 2 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 By Age 3 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275

4 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 5 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 6 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275 2,275

LDF 1-2 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.002-3 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.083-4 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.004-5 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.005-6 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Qtrly Incurred Loss @ 3 months 5,075 48% 5,075 48% 5,075 48% 5,075 48%Qtrly Incurred Loss @ 6 months 6,825 65% 6,825 65% 6,825 65% 6,825 65%

LDF 1.34 1.34 1.34 1.34

Loss Development Distortions

New Product (Growth) Environment1 2 3 4 5 6 7 8 9 10 11 12

Earned Premium 1 50 140 260 360 500 600 650 850 950 1,100 1,200

Reported 1 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Loss Ratio 2 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60%By Age 3 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%

4 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%5 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%6 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%

Reported 1 0 10 28 52 72 100 120 130 170 190 220 240 Losses 2 1 30 84 156 216 300 360 390 510 570 660 720 By Age 3 1 33 91 169 234 325 390 423 553 618 715 780

4 1 33 91 169 234 325 390 423 553 618 715 780 5 1 33 91 169 234 325 390 423 553 618 715 780 6 1 33 91 169 234 325 390 423 553 618 715 780

LDF 1-2 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.002-3 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.08 1.083-4 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.004-5 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.005-6 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Qtrly Incurred Loss @ 3 months 59 31% 485 43% 950 45% 1,518 47%Qtrly Incurred Loss @ 6 months 124 65% 728 65% 1,365 65% 2,113 65%

Actual LDF 2.12 1.50 1.44 1.39

Projected UltimateUsing Historical LDF's 79 41% 652 58% 1,278 61% 2,041 63%

“Large” Losses

How do you provide suitable results to business team without threat of overreaction?

Impact of Large Losses Large is typically considered $100K or even more Normally don’t expect large losses to impact short tailed lines

(Comprehensive, Collision, Property Damage) Early in rollout, calculate the Loss Ratio impact of $25,000 loss (average

cost of totaled car)- Provide to business team to give sense of materiality

STATE 1 STATE 2

MonthEarned Prem

Impact 25K on

LREarned Prem

Impact 25K on

LR04-Apr 3,000 833%05-May 100,000 25%06-Jun 300,000 8% 5,000 500%07-July 600,000 4% 80,000 31%08-Aug 800,000 3% 180,000 14%

Seasonality

Significant impact on loss ratio experience Weather Travel

Geographical differences abound Impact of catastrophes on comprehensive coverage First year and beyond – uneven weight of premium by state can cause

distortions in the loss ratios When comparing Actual Loss Ratios to Expected Loss ratios

Adjust ELR’s for seasonality Normalize actual loss ratios

Seasonality

CollisionLoss Ratio Relativities

0.600.700.800.901.001.101.201.301.401.50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Accident Month

NE

SE

SW

Seasonality

ComprehensiveLoss Ratio Relativities

0.600.700.800.901.001.101.201.301.401.50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Accident Month

NE

SE

SW

Seasonality

Comprehensive Loss Ratio RelativitiesAY 2006 YTD (even premium distribution)

0.600.700.800.901.001.101.201.301.401.50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

NE

SE

SW

Seasonality

Earned Premium DistributionAY 2006

0%

5%

10%

15%

20%

25%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

NE

SE

SW

Rolled out in 2005

Rolled out in Apr 2006

Rolled out in Jan 2006

Seasonality

Comprehensive Loss Ratio RelativitiesAY 2006 YTD (uneven premium distribution)

0.600.700.800.901.001.101.201.301.401.50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

NE

SE

SW

Comparison to Existing Products

Comparison to existing ultimate loss ratios and ELR’s Adjusted for seasonality Adjusted for New Product distribution by month Adjustment for “environmental” conditions

Other Analytical Tools

Triangles Files Drill down to monthly activity

- Trend or Blip? Analyze how quickly loss ratios settle down Analyze differences in development between New Product / Existing

Product

Frequency, Severity and Pure Premium Analysis Triangles of Reported and Ultimate Data Comparisons to Existing Product

Book of Business Analyze impacts as book of business ages

Triangle Files – New Product

State X Total (PD+Comp ex Cat+Coll)

New Product Accident MonthJan Feb Mar Apr May Jun Jul Aug

Earned Prem 3,000 52,000 120,000 200,000 270,000 315,000 440,000 500,000

Month 1 - Case ILR 0.0% 25.0% 12.0% 27.5% 23.0% 75.0% 24.0% 22.0%

1st eval 0% 50% 24% 55% 46% 150% 48% 44%2nd eval 0% 52% 150% 54% 48% 180% 48%3rd eval 0% 51% 150% 52% 50% 170%4th eval 0% 49% 140% 54% 49%5th eval 0% 49% 140% 54%6th eval 0% 49% 135%7th eval 0% 49%8th eval 0%9th eval10th eval11th eval12th eval

Ulti

mat

e Lo

ss R

atio

s as

of:

Please note: All numbers are fabricated but illustrate the types of results that can be seen

Triangle Files – Existing ProductState X Total (PD+Comp ex Cat+Coll)

Legacy Product Accident MonthJan Feb Mar Apr May Jun Jul Aug

Earned Prem 660,000 670,000 630,000 630,000 620,000 540,000 580,000 550,000

Month 1 - Case ILR 15% 20% 19% 30% 22% 65% 21% 21%

1st eval 30% 40% 38% 60% 44% 130% 42% 42%2nd eval 29% 42% 42% 60% 43% 135% 45%3rd eval 31% 41% 40% 59% 45% 125%4th eval 30% 43% 39% 58% 44%5th eval 30% 43% 39% 59%6th eval 30% 43% 39%7th eval 30% 43%8th eval 30%9th eval10th eval11th eval12th eval

Ulti

mat

e Lo

ss R

atio

s as

of:

Please note: All numbers are fabricated but illustrate the types of results that can be seen

Poor experience similar to new product

Better experience than new product

Book of Business

Additional analysis on where loss ratio is expected to go in future years As book of business ages, we expect loss ratios to improve Assumptions:

New Business Penalty / Renewal impacts on Loss Ratio Growth in New Business Retention Filed Rate Changes

Other Considerations

Separately analyze Catastrophe claims Excess / Large Losses

Analysis completed both with LDF method and Bornhuetter-Ferguson method to reduce volatility

Incorporation into Planning

Projections of future new business growth Projections of future retention / renewal

Incorporate into loss ratios, making additional adjustments for Seasonality Expected Excess Losses Expected Catastrophe Losses Additional mix shifts Anticipated rate / factor adjustments

Advantages of Monthly Methodology

Responsive – allows business team to analyze data and make decisions quickly Monthly loss development limits distortion due to growth Monthly loss development allows drill down Comparison to existing products allows recognition of environmental factors

Disadvantages of Monthly Methodology

Responsive – loss ratios can bounce around from month to month Responsive – susceptible to distortion by large losses Credibility – takes several months to have enough data to analyze Monthly loss development still may have some distortion due to growth Potential differences in loss development between products Potential impact of mix changes in book of business

Other Applications

Applies to more than just New Product rollout New Distribution Channel New States Accelerated Growth

Questions????