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COMPANY NAME

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Mandatory reinsurer of all residential property in Florida (excl. ... Role, as defined in Section 627.0628(3)(a), Florida Statutes: ... – PowerPoint PPT presentation

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Title: COMPANY NAME


1
Using Catastrophe Models for Pricing The
Florida Hurricane Catastrophe Fund
CAS Special Interest Seminar on Catastrophe Risk
Management October 8, 2002
Paul Budde, Ph. D., ACAS, MAAA Senior Vice
President
2
Florida Hurricane Catastrophe Fund
3
FHCF Ratemaking
Florida Hurricane Catastrophe Fund
  • FHCF is a tax-exempt state trust fund
    administered by the Florida State Board of
    Administration
  • Mandatory reinsurer of all residential property
    in Florida (excl. surplus lines insurers and
    reinsurers)
  • Limit available
  • 2002/03 Contract Year 11.00 billion
  • Subsequent season capacity 9.62 billion
  • 2002 annual premiums 468 million
  • Projected assets at 12/31/02 4.92 billion

4
FHCF Ratemaking
Florida Hurricane Catastrophe Fund
2002 Hurricane Season
Subsequent Season (Assuming 11B loss in 2002)
11.00 B
9.62 B
6.1 billion from bonding 2.21 assessment
9.15 billion from bonding 3.79 assessment
4.9 billion in net assets
461 million
Bonding Aamounts and assessment levels as
reported in May 14, 2002 Bonding Capacity Analysis
5
FHCF Ratemaking
Coverage
  • Covered events are all hurricanes causing
    property damage in Florida
  • Coverage includes additional living expenses
    beginning in 2002
  • 5 of reimbursable loss added (within limit) for
    LAE
  • Companies select 45, 75 or 90 coverage
  • Companies have individual retentions and limits
  • Retention 8.03106 x FHCF premium (2002/03)
  • Max. reimbursement 23.5254 x FHCF premium
    (2002/03, projected)
  • No reinstatement

6
FHCF Ratemaking
2002/03 Industry Coverage
1-in-45 yrs
16.33 B
FHCF Layer 88.08 of 12.49 billion excess of
3.84 billion
3.84 B
1-in-9.5 yrs
7
From Modeling to Pricing
8
FHCF Ratemaking
How is/are catastrophe models selected?
  • Florida Commission on Hurricane Loss Projection
    Methodology
  • Established in 1995
  • Role, as defined in Section 627.0628(3)(a),
    Florida Statutes
  • The commission shall consider any actuarial
    methods, principles, standards, models, or output
    ranges that have the potential for improving the
    accuracy of or reliability of the hurricane loss
    projections used in residential property
    insurance rate filings. The commission shall,
    from time to time, adopt findings as to the
    accuracy or reliability of particular methods,
    principles, standards, models, or output ranges.
    (emphasis added)
  • FHCF uses all models deemed acceptable by
    Methodology Commission
  • to the extent feasible, the FSBA must employ
    actuarial methods, principles, standards, models,
    or output ranges found by the Commission to be
    accurate or reliable in producing rates for the
    FHCF reimbursment premium. (Section
    627.0628(3)(b), F.S.)
  • Models used for 2002/2003 AIR, ARA, Catalyst,
    EQE, RMS

9
FHCF Ratemaking
What Data to be Modeled?
  • FHCF Goal Provide all modelers with same data in
    a format that minimizes assumptions needed
  • Start with data from prior year data call
  • Cleansed
  • Adjusted, as necessary
  • Trended forward one year
  • Aggregated

10
FHCF Ratemaking
How well does the data being modeled represent
actual loss potential?
  • Invalid ZIP Codes
  • Law and Ordinance
  • Losses to FHCF layer
  • Pure premium to the layer
  • No reinstatements
  • Internal FFT aggregation model used to limit
    losses to one limit
  • ReMetrica simulation to verify
  • 2.1 reduction

11
FHCF Ratemaking
How can we combine modeled results?
  • Simple average
  • Equal weight to each result
  • Median value
  • Drop high and low
  • Mode
  • Some answers are closer to others. Ought those
    get more weight?
  • Weighted average
  • 5 / 20 / 50 / 20 / 5 weighting scheme
  • If a model is revised, or if the mix of models
    changes, will overall changes be significant?
    (stability vs. accuracy)

12
FHCF Ratemaking
Credibility theory?
  • What credibility weight to
  • Prior year modeling?
  • Prior versions of a model?
  • FHCF has given full credibility to most recent
    modeling work
  • Best expression of actual exposure
  • With stochastic simulations of 50,000 years,
    modeling results represent a complete
    historical picture
  • Assumes models are always improving, never
    regressing

13
FHCF Ratemaking
How much total premium do we need to charge?
  • Excess losses to layer
  • Retention and limit adjustment
  • Post-model adjustment factors
  • Investment income credit
  • Fixed expense loadings
  • Premium credits
  • 2002/03 FHCF premium 467.6 million

14
FHCF Ratemaking
How is the premium allocated to risks?
  • Primary Rating Factors
  • Location, location, location!
  • Type of business
  • Deductibles
  • Construction
  • Premium credits

15
FHCF Ratemaking
How are loss costs combined?
  • Detailed ZIP Code level loss costs from 3
    modelers
  • Combined through straight average
  • Used to define territories and allocate premium
    across the different risk classifications

16
FHCF Ratemaking
Assigning ZIP Codes to Territories
  • Residential base (2) deductible
  • Loss costs for blended construction
  • Ranked

17
FHCF Ratemaking
Territories
  • 25 Regions
  • ZIP Code definitions
  • Based on losses to layer
  • Revised annually
  • Changes tempered

18
FHCF Ratemaking
References
  • Florida Hurricane Catastrophe Fund
  • 2002 Ratemaking Formula Report to the
  • Florida State Board of Administration
  • March 28, 2002
  • Available through the FHCF website
  • http//www.fsba.state.fl.us/fhcf/
  • (Look for meeting materials from the 28 March
    2002 Advisory Council meeting, amended to final
    mitigation levels)

19
FHCF Ratemaking
Speaker Notes
  • Paul E. Budde, Ph.D., ACAS, MAAA
  • Senior Vice President
  • Benfield Blanch
  • 3600 W 80th St
  • Minneapolis, MN 55431
  • Paul.budde_at_benfieldgroup.com
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