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Reinsurance Symposium 2016 MAY 10 12, 2016 GEN RE HOME OFFICE, STAMFORD, CT A Berkshire Hathaway Company

Reinsurance Symposium 2016 MAY 10 12, 2016 GEN RE HOME OFFICE, STAMFORD, CT Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Presented by Paul Wagner, Marc Dahling and Craig Beardsley Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 2

Paul Wagner Treaty Account Executive Los Angeles Introductions Marc Dahling Property Treaty Line of Business Underwriter Stamford Craig Beardsley Treaty Underwriting Manager Stamford Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 3

Agenda Day 1 Day 2 1 Prequalification and Strategy 4 Underwriting and Rating Continued 2 Data and Information Request 5 Quote Development 3 Underwriting and Claims Review 6 Proposal and Service Plan 4 Underwriting and Rating 7 Post-Proposal Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 4

Quotation Process and Timeline Prequalification and Strategy Underwriting and Claim Reviews Quote Development Post-Proposal 1 2 3 4 5 6 7 Data and Information Request Underwriting and Rating Proposal and Service Plan Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 5

Relevance Why this is important? Better understanding of: The proposal process How we use client provided data How we incorporate exposure and experience rating to develop a specific rate for your business Why this is challenging? From the perspective of data usage and rating methods employed, this can be a detailed exercise We will do our best to provide a broad overview of a complex topic Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 6

What people think happens Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 7

What we hope you take away No to: the Black Box Yes to: Highly collaborative process between the prospect and the Gen Re team Using a variety of rating approaches to present our clients and prospect with the best options Exposure Experience Credibility Underwriting judgment Delivering high quality book management tools to our clients and prospects Accurate data for better pricing Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 8

Collaboration How We Work Together Account Manager Business Development Specialist You Account Executive Underwriter Claims Line of Business Specialist Pricing Actuary Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 9

Team Roles Account Executive Account Underwriter Needs Prospect / Client Underwriting Resource Communication Liaison between client / prospects and Gen Re Proposal Internal resource coordination Knowledge Market Line of business Timeline management Underwrite for a Profit Monitor results Annual Review Underwriting reviews Review updated qualitative information Rating Referral Training and Development Monitor results Metrics and Compliance Effective rate change Benchmark Line of Business Standards Compliance When to deviate Marketing Needs Book direction Trends Line of business expertise Emerging issues Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 10

1 1. Prequalification and Strategy Getting to know each other Identifying a good match Opportunity to quote Agreement between marketing and underwriting Resource assignment Team strategy and timelines Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 12

2 Data and Information Request Data Request Limits Profiles Class / State Mix Claim Data loss listing, description, policy limits, etc. Usually at least five to 10 full years of loss Prefer ground up Subject Premium History Projection for next year Individual policy level information for Commercial General Liability and Commercial Property Actuarial Reserve Study Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 14

Other Uses for the Data In addition to using the data for rating purposes, we also look for opportunities to present book management tools aimed at: Saving money Increasing efficiency Identifying issues Fixing problems Increasing growth Improving net profits Second nature for a direct reinsurer such as Gen Re. Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 15

Book Management Objectives Saving Money Data quality Rank exposures Identify outliers Increasing Efficiency Book Metric for Exposure Identification and Targeted Audits Identify Compliance with Your Underwriting Directives Identifying Issues Emerging Exposures Identifying Trends Exposure Changes Jurisdictional Analysis Fixing Problems Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 16

Book Management Objectives Increasing Growth Producer targets Pricing guidelines Marketing campaigns Improving Net Profit Identify exposures driving reinsurance needs Modeling to project ceded premiums, losses, and commission for different reinsurance structures Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 17

Book Management Tools Featured Tools PEER Property Exposure Review CLEAR Casualty Lines Exposure Analysis Report Underwriting Audits DRA Dynamic Reinsurance Analysis MapPML Accumulation Management Gross Line Tools Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 18

3 Underwriting Review Process Management Discussions Your Strategy, Business, Opportunities and Concerns Goals, objectives, incentives, etc. Operational How your company defines success File Review Your Business How the company underwrites its risks How the company selects business How the company prices How you use metrics to manage Understand the company s underwriting guidelines Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 20

3 Claim Review Process To understand how the company handles its claims Philosophy Organizational capabilities Reserving practices Individual claim management Outside Expert Network (Gen Re can help!) Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 21

4 Underwriting and Rating thoughts Oh goodie, now I can find out how my rate is developed! Just tell me what I need to do to get the lowest reinsurance rate possible! How can we make the quote process easier? Do they really use all that data and information they request? How can this help our company? Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 23

Risk Disciplined, Consistent Approach to Evaluating Risk and Risk Transfer Point estimate and range Continuity Actuarially-based, model enhanced Science Judgmentally informed and adjusted Art Industry-based defaults and company-specific indications Credibility Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 24

Interrelated Disciplines and Processes Pricing and Parameterization Benchmarks Line of Business / Product Development Expertise Transaction / Relationships Clients Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 25

Risk Transfer Progression Process Risk Parameter Risk Model Risk Process Risk Inherent variability in random process (variability around the mean) Parameter Risk The actuarial method underlying the estimate do not accurately represent the true characteristics of the risk (incorrect mean) Model Risk Possibility that the model is inappropriate Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 26

Process Risk Probability 0 Loss Expected Loss Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 27

Parameter Risk Probability 0 Shift in Distribution or Change in Shape Loss Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 28

Model Mania Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 29

Layers Layers of Risk Catastrophe 1 loss in every 10 30 years Capacity 1 loss every 5 10 years Exposure 1 2 losses per year Working 5 10 losses per year Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 30

Underwriting Curiosity Qualitative Information Business Plan including new initiatives Underwriting guidelines Production sources Delegated underwriting authority and oversight Policy forms, endorsements, applications Operational issues audit, loss control Competitors / peers Market niche We want to get to know you Current reinsurance structure Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 31

Underwriting and Pricing Process Checking the data Validation and verification Quality and consistency Formatting the data Underwriter makes pricing selections and sets terms and conditions Referral process with Marketing and Underwriting equally represented Rating parameters to be used Loss adjustment expense treatment Trend selections Data to pricing actuaries for rate study Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 32

Rating Overview Direct Loss Ratio Exposure Experience Direct Loss Ratio Estimate Credibility Weighted Excess Ratio Expected Excess Loss Cost Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 33

Rating Overview Direct Loss Ratio Exposure Experience Company Data Industry Data Company Exposure Data Parameters, Size of Loss Curves Excess Losses, Direct Losses Parameters Direct Loss Ratio Estimate Expected Excess Loss Cost Industry Loss Distribution with Your Data Credibility Weighted Excess Ratio Company Average Excess Ratio Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 34

Company Loss Ratio Based on Annual Statement data Up to 10 years Usually do not re-evaluate Incurred but Not Reported (IBNR) reserve adequacy Exclude modeled cats Package policy allocations HO per ISO data Commercial per annual statement Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 35

Industry Loss Ratio Based on industry experience and Gen Re selected parameters Trends (frequency, severity) Industry Experience Annual Statement (excluding modeled catastrophes) Commercial General Liability (ISO based) Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 36

Direct Loss Ratio Estimate Company and Industry Loss Ratio Compare Loss Ratios: Company Loss Ratio vs. Industry Loss Ratio in Company s Geographic area Compare company characteristics to industry characteristics Percentage of premium allocated to property on a package policy Commission ratios Size of company Credibility weighted blend indications from two comparisons Relationship of company to industry Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 37

Why Exposure Rating Matters An absence of loss is not an absence of risk Actual short-term loss experience often varies from technical normalized experience Pressure may be enormous to accept good loss experience as a basis for reducing premiums Provides a rate indication based on the characteristics of your business based on a relevant benchmark Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 39

What is an Exposure Rate? An estimate of the future vulnerability to loss Expected loss is based on the experience from a large group of similar risks Expected loss is loaded to include overhead and profit to develop a rate The exposure rate should be a stable and accurate measure of the quantitative exposure to loss Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 40

When is it Best to Exposure Rate? Besides always High layers with less credibility New layer or product line During market transitions like that ever happens in insurance. Most likely sustainable over time; consistent with smoothing function of reinsurance Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 41

What Information is Needed for Exposure Model? Limits profile Expense treatment Policy form Reinsurance contract State and class mix Exposure characteristics (Occupancy, Hazard mix) Premium projections Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 42

Exposure Rating Considerations Recognize any changes that you anticipate during the rating period Territory Mix of business within a line Limits profile Differentiate your book from everyone else What makes you unique? This is not based solely on data (underwriting reviews, guidelines, etc.) Other exposures that need to be considered? Unusual losses Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 43

Reinsurance Symposium 2016 Property Exposure Rating Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 44

Why Exposure Rate? Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 45

Property Limits Profile Constructed to match Treaty contract definition of Risk For lines of business to be reinsured Total insured value (all main coverage parts) by Risk Ground-up premium for each Risk Sorted into bands of coverage Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 46

What Does a Property Limits Profile Look Like? Total Insured No. of Ground-Up Ground-Up Ground-Up Value Bands Locations Total Insured Value Premium Rate $0 $100,000 3,905 $ 227,671,000 $ 796,849 $0.35 $100,001 $300,000 1,811 $ 367,236,000 $ 1,138,432 $0.31 $300,001 $500,000 1,146 $ 462,583,000 $ 1,248,974 $0.27 $500,001 $1,000,000 553 $ 413,792,000 $ 910,342 $0.22 $1,000,001 $2,000,000 348 $ 515,477,000 $ 927,859 $0.18 $2,000,001 $5,000,000 163 $ 581,421,000 $ 930,274 $0.16 $5,000,001 $10,000,000 32 $ 243,264,000 $ 267,590 $0.11 Total 7,997 $ 2,811,444,000 $ 6,220,320 $0.22 Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 47

Property Limits Profiles Pitfalls Profiles that are per Policy, not per Risk Overstates exposure for multi-location policies ($9 million excess $1 million layer and 10 separate $1 million Risks) Understates exposure for multiple policies at one location shopping mall, office tower, etc. ($9 million excess $1 million layer with 10 separate $1 million Policies in one building Risk) Homeowners Coverage A only or A, B, C and D? Insurance-to-Value Problems Businessowners Policy Actual loss sustained for time element (business interruption) Top band e.g., $20 million and over Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 48

What are the Excess of Loss Tables and Curves? Excess of Loss tables are used to layer losses only There is no load in these tables for expense, risk load or profit Segmentation of data Construction Occupancy Protection Peril Size of risk or (size of limit) Reflects that most property losses are partial losses Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 49

What are the Excess of Loss Tables and Curves? Retention as a % of Ins. Value Retained Factor Excess Factor 0% 0.0% 100.0% 5% 43.8% 56.2% 10% 54.2% 45.8% 25% 76.9% 27.9% 50% 89.0% 11.0% 67% 94.6% 5.4% 100% 100.0% 0.0% The tables relate the percentage of retained and excess loss to total loss for different retentions. Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 50

What are the Excess of Loss Tables and Curves? With 10% attachment point, average scale allocates 45.8% of loss dollars to the Excess layer and retains 54.2% net. Other curves that account for other risk factors: Occupancy Offices, Apartments 33.9% -26% Warehouses 71.5% +56% Construction Fire Resistive 39.2% -14% Frame 56.7% +24% Protection Sprinklered 33.5% -27% Non-Sprinklered 47.2% +3% Size of Risk Total Insured Value < $100,000 59.7% +30% Total Insured Value > $5,000,000 13.4% -70% Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 51

Reinsurance Symposium 2016 Casualty Exposure Rating Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 52

Why Exposure Rate General Liability and Workers Compensation? Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 53

Why Exposure Rate Auto Liability? Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 54

General Liability Specific Issues Commercial General Liability Individual policy level data (limits, exposures, class codes, premium, state) Loss costs, Increased limits factors, Loss cost multipliers Businessowners Policy issues Homeowners Limits profiles Coverage forms Exposure guidelines dogs, trampolines, pools, underground storage tanks, etc. Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 55

Workers Compensations Specific Issues NCCI class codes Class groupings Exposure Relativity Factors (hazard grades) Company loss ratio States Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 56

Automobile-Specific Issues Commercial Auto Fleet breakout (vehicle types) Working on more territorial differentiating within a state Policy limits Personal Auto We usually only experience rate Low limits lead to more experience credibility Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 57

Info On Two Different Companies Commercial General Liability Example Both write $10 million in General Liability premium Both write in New England states Both write 70% Premise/Operations and 30% Products/Completed Operations Both write policy limits of $300,000, $500,000 and $1,000,000 Both want to reinsure $750,000 excess $250,000 So they get the same price, right? Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 58

Are They Similar Companies? Both write $10 million in General Liability premium One is Businessowners Policy and Commercial Multiperil, the other is all monoline Both write in New England states One is mostly metro, the other rural Both write 70% Premise/Operations and 30% Products/Completed Operations One writes 50% contracting, the other 15% contracting Both write policy limits of $300,000, $500,000 and $1,000,000 One writes 95% at $1 million, the other 50% at $1 million Both want to reinsure $750,000 excess $250,000 One wants Loss Adjustment Expense in the reinsurance limit, the other wants pro-rata Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 59

Example Impact of Policy Level Detail Comparison of Rates Average Pricing 4.29% Higher Exposures 7.03% Lower Exposures 1.45% Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 60

Five Takeaways Exposure Rating 1. It s your exposure rate 2. Based on your book of business 3. Understanding the exposure excess ratio 4. Data quality makes a difference Book differentiation 5. Best estimate for the future Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 61

Experience Rating From a Typical Investment Prospectus: The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. Experience Rating follows the same principles and caveats Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 63

Experience Rating Analysis of a Primary Insurer s Historical Loss Experience Restates past losses evaluated at a recent date and then projected under future conditions Assumes that a Primary Insurer s historical experience is predictive of the future Results in an Experience Excess Ratio Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 64

Experience Excess Ratio Experience Excess Ratio = Estimated Ultimate Excess Losses (under future conditions) Estimated Ultimate Direct Losses (under future conditions) Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 65

Experience Excess Ratio The individual year s indications are then aggregated into various views (three-year, five-year, relevance weighted average, etc.) to determine the most representative observation period to project the future Estimated Ultimate Losses = Actual Case Incurred Losses (Paid + Case reserves + Allocated Loss Adjustment Expense (ALAE), if covered) adjusted for: Loss trend Loss development including Incurred But Not Reported (IBNR) Other factors (changes in book, terms of Treaty, unusual losses) Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 66

Experience Example Three Companies (A, B, C) All write similar business All have a reinsurance layer of $450,000 excess $50,000 Each averages $1,500,000 in ceded losses per year to their layer Six-year experience period Do they all deserve the same Experience Excess Ratio? Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 67

Experience Example Company A $2,500,000 $2,000,000 Actual Losses $1,500,000 Annual Average $1,000,000 $500,000 $0 2010 2005 2011 2006 2012 2007 2013 2008 2014 2009 2015 2010 Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 68

Experience Example Company B $2,500,000 $2,000,000 Actual Losses $1,500,000 Annual Average $1,000,000 $500,000 $0 2010 2005 2011 2006 2012 2007 2013 2008 2014 2009 2015 2010 Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 69

Experience Example Company C $2,500,000 $2,000,000 Actual Losses $1,500,000 Annual Average $1,000,000 $500,000 $0 2010 2005 2011 2006 2012 2007 2013 2008 2014 2009 2015 2010 Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 70

Loss Trend Allows us to restate prior experience to an expected future cost level Accounts for the impact of inflation over time Social inflation Economic inflation Coverage inflation Two components that impact estimated ultimate losses Severity component average loss per claim Frequency component average number of claims per exposure Each ground-up loss is Severity Trended from the actual accident dates to the average accident date of the proposed Treaty period (e.g., 7/1/2016). Then the losses for each Accident Year are aggregated and Frequency Trended from the actual accident dates to the average accident date of the proposed Treaty period. Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 71

Leveraged Impact of Trend For a fixed attachment point, excess reinsurance layers experience a higher Severity Trend than the Ground-Up Trend and fixed Retention Trend. Incurred Loss Ground-Up $450K xs $50K $50K Retention $150,000 $100,000 $50,000 Ground-Up 5% Trend x 1.05 Trended Loss = $157,500 $107,500 $50,000 Annual Severity Trend 5.0% 7.5% 0.0% Summary Severity Trend the Ground-Up loss, then layer it. Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 72

Loss Development Trended layered losses (in the aggregate) are developed to their ultimate values using a representative loss development pattern commonly depicted as a loss triangle. Loss development captures the following: Changes to known loss values at future evaluations (case reserve development) Incurred but not reported losses (pure IBNR) The loss triangle should consist of excess reported losses Excess of a similar retention to that being rated Same line of business Ideally, specific to the cedent (versus industry average) Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 73

Loss Development Pattern Primary Insurer vs. Reinsurer Loss development is faster (the ultimate value of losses are known sooner) for a primary insurer than it is for a reinsurer. This is due to: The increased time it takes a claim to reach higher attachment points The natural delay in reporting to the reinsurer Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 74

Estimated Ultimate Loss Property Example Accident Year 2013 Reported Loss (incl. Allocated Loss Adjustment Expense) Loss Trend Factor (7/1/13 to 7/1/16) (1.10 x 1.10 x 1.10 = 1.331) Trended Loss Layered Loss Actual Loss Loss Trend Factor = 1.331 $450K xs $50K $ 150,000 $ 199,650 $ 149,650 $ 50,000 $ 66,550 $ 16,550 $ 104,669 $ 139,314 $ 89,314 $ 700,000 $ 931,700 $ 450,000 $ 35,000 $ 46,585 $ 0 $ 250,000 $ 332,750 $ 282,750 $ 350,000 $ 465,850 $ 415,850 $ 45,000 $ 59,895 $ 9,895 Total $2,242,294 $ 1,414,009 Loss Development Factor (36 to Ultimate) 1.02 Estimated Ultimate Loss and Allocated Loss Adjustment Expense $450K excess $50K $ 1,442,289 Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 75

Estimated Ultimate Loss Auto Liability Example Accident Year 2013 Reported Loss (incl. ALAE) Loss Trend Factor (7/1/13 to 7/1/16) (1.10 x 1.10 x 1.10 = 1.331) Trended Loss Layered Loss Actual Loss Loss Trend Factor = 1.331 $450K xs $50K $ 150,000 $ 199,650 $ 149,650 $ 50,000 $ 66,550 $ 16,550 $ 104,669 $ 139,314 $ 89,314 $ 700,000 $ 931,700 $ 450,000 $ 35,000 $ 46,585 $ 0 $ 250,000 $ 332,750 $ 282,750 $ 350,000 $ 465,850 $ 415,850 $ 45,000 $ 59,895 $ 9,895 Total $2,242,294 $ 1,414,009 Loss Development Factor (36 to Ultimate) 1.177 Estimated Ultimate Loss and Allocated Loss Adjustment Expense $450K excess $50K $ 1,664,289 Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 76

Do Loss Trend and Loss Development Overlap? NO Example Four losses, all will settle and close with a value of $500,000 in 2016 dollars, and valued at 7/1/2016 $500,000 $250,000 $50,000 Date of Loss Status Trend Nominal Loss 4/1/07 Closed Development Trend Nominal Loss 4/1/09 Open Development Trend Nominal Loss 4/1/13 Open Trending brings the loss amount at occurrence to current cost level Development brings the trended loss amount to ultimate IBNR?? Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 77

Five Experience Rating Takeaways 1. Your track record may be predictive of the future 2. Excess loss to Direct loss concept 3. Comparing your experience excess ratio to exposure excess ratio How appropriate? Why the differential? 4. Up to 10 years of history 5. Data and Parameters (quality, quality, and quality) Client Industry Gen Re Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 78

5 Quote Development Finalizing the Numbers We review Experience and exposure excess loss ratios Credibility weighting of two methodologies We apply Loss Ratio estimate to develop rate Underwriting and Rating Rating is a subset of underwriting Both are linked Underwriting Selection, Understanding and Modifications Client-Specific Better for you and us! Quality data is critical Credibility is a factor We supplement, where needed, with data from other industry sources and Gen Re proprietary analysis Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 80

How Do We Select Excess Ratio? Exposure Experience Experience UW Selected Limit and Retention Excess Ratios Excess Ratios Credibility Excess Ratio 1 st Layer: $250,000 excess $250,000 6.45% 6.49% High 6.48% 2 nd Layer: $2,500,000 excess $500,000 4.37% 5.52% Low / Med 4.65% 3 rd Layer: $7,000,000 excess $3,000,000 3.80% 16.25% Slight 3.85% Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 82

How Do We Select Excess Rate? Selected Loss Unloaded Net Limit and Retention Excess Ratios Ratio Rate 1 st Layer: $250,000 excess $250,000 6.48% 50% 3.24% 2 nd Layer: $2,500,000 excess $500,000 4.65% 50% 2.33% 3 rd Layer: $7,000,000 excess $3,000,000 3.85% 50% 1.93% Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 83

6 Proposal and Service Plan Proposal A comprehensive response to your needs Alternatives for your consideration Affirmation of data used to develop the quotation Observations and how our quote responds In most instances, we will provide a full draft contract with actual terms and conditions Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 85

6 Proposal and Service Plan Service Plan As a direct reinsurer, the Service Plan is a key component of our product offering It s the workplan for our relationship Review of the prior year s activity (renewal) Establishment of coming year s services Publications Conferences, seminars and training Underwriting and claims reviews Policy form and endorsement reviews Marketing and promotional assistance Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 86

6 Proposal and Service Plan Culmination of all of our efforts Truly a Team Effort Prospect / Client Ability to provide quality data Gen Re Marketing and Underwriting Other critical departments Claims, Account Management, Pricing Actuarial Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 87

7 Post-Proposal Resolution of outstanding questions Exploration of proposed options Assistance in analyzing competing proposals Validation of selected parameters Examination of coverage questions Presentation to management or the Board of Directors Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 89

What We Covered Yesterday and Today Prequalification and Strategy Data and Information Request Underwriting and Claims Review Underwriting and Rating Quote Development Proposal including Service Plan Post-Proposal Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 90

Takeaways Here Are Five Takeaways 1. Customized and tailored for your unique business and operations 2. Properly reflects your specific exposure profile and experience 3. Structured to achieve your objectives 4. Competitively priced with open exchange of how priced 5. A positive experience Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 91

Reinsurance Symposium 2016 Questions? Reinsurance Symposium 2016 Developing a Treaty Quotation Treaty Underwriting and Rating Concepts Paul Wagner, Marc Dahling and Craig Beardsley 92