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These probabilities
correspond to
these total LR's
100%
5%
0.5%
1.3%
1.8%
1.3%
0.3%
140%
155%
165%
177%
200%
Common Frequency
Distributions
Poisson
f(x|) = exp(-) ^x / x!
where = mean of the claim count
distribution and x = claim count =
0,1,2,...
f(x|) is the probability of x losses, given a
mean claim count of
x! = x factorial, i.e. 3! = 3 x 2 x 1 = 6
Poisson distribution assumes the mean and
variance of the claim count distribution are
equal.
reinsurance layer.
Estimate ultimate claim counts by year by
developing trended claims to layer.
Multiply trended claim counts by frequency trend
factor to bring them to the frequency level of the
upcoming treaty year.
Adjust for change in exposure levels, i.e..
Adjusted Claim Count year i =
Trended Ultimate Claim Count i x
(SPI for upcoming treaty year / On Level SPI year i)
Poisson parameter equals the mean of the
ultimate, trended, adjusted claim counts from above
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(^2 / ) = 1 + c
If the claim count distribution is Poisson,
then c=0
If it is negative binomial, then c>0, i.e.
variance is greater than the mean
Solve for the contagion parameter:
c = [(^2 / ) - 1] /
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= 1/c;
= c; c = contagion parameter
Using Excel, simulate gamma random variable
as follows: Gammainv(Simulated CDF, , )
Simulated Poisson parameter =
= x Simulated Gamma Random Variable Above
Use the Poisson distribution algorithm using the
above simulated Poisson parameter, , to simulate
the claim count for the year
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13
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1.50
0.808
2
Prob
Count
<= X
99.56%
99.91%
99.98%
100.00%
100.00%
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2.20
0.645
3
Prob
Prob
Claim Poisson
Count Claim Poisson
Count
Count Probability <= X Count Probability <= X
0
11.13% 11.13%
5
4.73%
97.53%
1
24.44% 35.57%
6
1.73%
99.26%
2
26.83% 62.40%
7
0.54%
99.80%
3
19.63% 82.03%
8
0.15%
99.95%
4
10.77% 92.80%
9
0.04%
99.99%
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Modeling Severity
Common Severity Distributions
Lognormal
Mixed Exponential (currently used by ISO)
Pareto
Truncated Pareto.
This curve was used by ISO before moving to the Mixed
Exponential and will be the focus of this presentation.
The ISO Truncated Pareto focused on modeling the
larger claims. Typically those over $50,000
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Truncated Pareto
Truncated Pareto Parameters
t = truncation point.
s = average claim size of losses below truncation point
p = probability claims are smaller than truncation point
b = pareto scale parameter - larger b results in larger
unlimited average loss
q = pareto shape parameter - lower q results in
thicker tailed distribution
Cumulative Distribution Function
F(x) = 1 - (1-p) ((t+ b)/(x+ b))^q
Where x>t
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Pareto Parameters
B
79,206
Q
1.39
P
0.858
Reinsurance Layer:
750,000
Pareto Probability of Loss < Reins Att Point:
Simulated CDF:
Transformed CDF for Losses Simulated to the Excess Layer:
Simulated Loss:
Simulated Loss to Layer:
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S
6,090
T
50,000
xs
250,000
96.13%
0.4029
0.9769
397,876
147,876
Pareto Parameters
B
79,206
Q
1.39
P
0.858
Reinsurance Layer:
750,000
Pareto Probability of Loss < Reins Att Point:
Simulated CDF:
Transformed CDF for Losses Simulated to the Excess Layer:
Simulated Loss:
Simulated Loss to Layer:
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S
6,090
xs
T
50,000
250,000
96.13%
0.8400
0.9938
1,151,131
750,000
Simulation Summary
Year 1 Simulation
Year 2 Simulation
Claim Losses
Count to Layer
2 147,876
750,000
Total: 897,876
3 576,745
281,323
54,726
Total: 912,794
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Profit Commissions
Already covered
Swing Rated Premium
Annual Aggregate Deductibles
Limited Reinstatements
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x 1.1 = 14%
Burn = 2%. Rate = 3% + 2% x 1.1 = 5.2%.
Burn = 14%. Calculated Rate = 3% + 14% x 1.1 =
18.4%. Rate = 15% maximum rate
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