2005 CAS Ratemaking Seminar Pricing and Market Conditions:Financial Lines

Measuring Risk for D&O Liability

Ben Fidlow, FCAS, MAAA

2March 2004 CAS Ratemaking Seminar

Executive Protection (D&O) Risks

Securities Class Action Lawsuits Brought by shareholders themselves Derivative Actions – Brought by shareholders on behalf of the

company itself Individual Shareholder Lawsuits Employment Practices Litigation Other Third-Party Lawsuits (government/regulators, competitors,

clients/customers)

3March 2004 CAS Ratemaking Seminar

Biggest Risk = Securities Class Actions

Exposure Base – Total Assets, Revenue, Market Capitalization Pricing – Current market cap, 52-week high MC, moving averages,

historical price dips Reserving – Class period MC loss, event MC loss, maximum dollar

loss, bounce-back effect, loss relative to the market as a whole

Expectation is the Key How to measure it? When is it misplaced?

4March 2004 CAS Ratemaking Seminar

Securities Class Action - Data Issues

Lack of Loss and Exposure Data Anomalies

IPO Laddering Analysts Mutual Fund Scandal Insurance Bid-Rigging

Median vs. Mean Market Cap Loss Settlements

Historical Financial Data Mergers Bankruptcies

Settlement Amounts vs. Actual Insurer Losses

5March 2004 CAS Ratemaking Seminar

Actuarial Science – Where Do We Fit In?

Not Easy – Why? Parameter Risk Price Monitoring

Renewal Analysis– Premium per million of limit (Rate Per Million)– Adjust for attachment, change in market cap, coverage terms– Changes in perceived risk levels– Exclude certain accounts

Non-renewals Overall portfolio Monitor specific pricing statistics

Assist Underwriting Set benchmarks, minimums Actuarial input into rating plans Black Box Explicitly recognize and define risk characteristics

6March 2004 CAS Ratemaking Seminar

D&O Actuarial Science – Specifics

Trend Frequency – Look at number of filings, what is the universe of publicly

traded companies? Severity

– Consultants and other agencies track settlements by Settlement Year

– Analysis should be done by Filed Year• Equity run-up of the late ‘90s and subsequent bubble burst• Downward bias (bigger claims take longer to settle)

– Annualized Factor– Risk Segmentation – Limits Usage

Need to reflect current economic environment

7March 2004 CAS Ratemaking Seminar

Class Action Settlements - Examples

Filed Settled Settlement Settlement %Case Year Year Amount of MC Loss

Amgen 1998 2000 1,000,000 0.2%

Mattel 1999 2002 122,000,000 2.5%

Sykes Enterprises 2000 2003 30,000,000 6.7%

Dollar General 2003 2003 10,500,000 0.9%

Columbia/HCA 1997 2004 49,500,000 -4.2%

Market Cap Loss is measured as the loss over the entire class period

Correlation to Market Cap Loss

8March 2004 CAS Ratemaking Seminar

Settlements - Filed Year vs. Settlement Year

05,000,000

10,000,00015,000,00020,000,00025,000,00030,000,00035,000,00040,000,00045,000,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Filed Year

Settled Year

Log. (Filed Year)

Log. (Settled Year)

Data as of 6/01/04

9March 2004 CAS Ratemaking Seminar

D&O Actuarial Science – Specifics

Severity Distributions Rate on Line – Excess pricing should be mathematically, not

competitively driven Segmentation into Homogeneous Groups

– Market Cap Size– Industry

Companion Suits (Institutional Investor) Other D&O Claim Types

10March 2004 CAS Ratemaking Seminar

Segmentation – Average Settlements by Filed Year

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004

Small Cap

Large Cap

Mega Cap

Data as of 6/01/04* 1998 Mega Cap amount limits Cendant to $500M

*

11March 2004 CAS Ratemaking Seminar

Segmentation – Average and Median Settlements by Filed Year

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004

Small CapAverageLarge CapAverageMega CapAverageSmall CapMedianLarge CapMedianMega CapMedian

Data as of 6/01/04* 1998 Mega Cap Average amount limits Cendant to $500M

*

Questions?