Commercial Property Insurance & Modelling and Pricing of Commercial Property

Commercial Property Insurance

&

Modelling and Pricing of

g

g

Commercial Property

Insurance

Insurance

A.Sertem Demir

Commercial and Corporate Lines Commercial and Corporate Lines Underwriting Coordinator

Huge

potential

to

grow

in

Emerging

Markets

Turkey will be catching up the European countries...

Projected GDP per capita in USD

IND IND IND

Projected GDP in USD bn

TUR TUR TUR

BRA CHN BRA CHN BRA CHN TUR _TUR TUR BRA IND RUS BRA IND RUS BRA IND RUS RUS JAP RUS JAP RUS JAP RUS GER RUS GER RUS GER GBR GBR GBR GER USA GER USA GER USA GBR GBR GBR CHN JAP USA CHN JAP USA CHN JAP USA USA 2000 2010 2020 2030 2040 2050 2060 USA USA 2000 2010 2020 2030 2040 2050 2060 2

Turkish Property Market 2011

• Technical profitability over 

years (technical profit/ GWP)

years (technical profit/ GWP)

2008 14,09%

2009

9,81%

2010

9,79%

2011

7 41%

2011

7,41%

Source: Turkish Insurance and Reinsurance Companies Assocation

Standardization of Occupancies/ Activities

Standardization of occupancy/ activity codes: ‐ Is Good for communicating the technical issues ‐ Enables better portfolio analysis ‐ Makes possible to use simplified basic rate or mixed base rate usage ‐ Guarantee improved data quality for the future Two available options: SIC or NAICS (charge of free) Could be imported through: www.sic.org

Basic Risk Premium

Basic Risk Premium: Sum Insured * Base Rate Base rate is based on: Ground‐up, full limits (SI) Pure loss cost + Allocated loss adjustment expenses Average risk assumption No political exposure and the location is of an equivalent to a location in WE Distinct rates by peril: FLEXA, AOP, Wind, Earthquake & Flood Flexa rates are split by industry groups (SIC or NAICS) And is unique and dynamic for all perils, occupancies/ activities,  companies and portfolios!

Modifiers and Manual Underwriting Adjustments

Modifier: is an adjustment which is determined by an objective measurement e.g.

Favorable risk engineering score, sprinkler protection, building construction etc.

Manual Underwriting Adjustment: is a deliberate adjustment made by underwriter to reflect features that are not taken into account in modifiers.**

Components of Pricing Property Business

Turkish market uses the following pricing components: 1. FLEXA 2. All other perils 3. Earthquake 4. SRCCMA and terrorism At Zurich we use the following components: 1. FLEXA 2. Windstorm 3 Fl d 3. Flood 4. AOP 5. Earthquake

FLEXA Pricing

Flexa rates are split by industry groups (SIC or NAICS) Each location or fire area should be priced separately based on SIC/NAICS of the most exposed occupancy/ activity, if this activity unless this activity is less than: 10% of the values or area occupied, or less than 25% if the most exposed occupancy/ activity is a warehouse İ hi h h SIC/NAICS f h l d / i i b d İn which case the SIC/NAICS of the lower exposed occupancy/ activity can be used.

FLEXA Pricing

Mixed base rate: If the location or fire area is a mixture of different occupancies/ activities and one SIC/NAICS does not properly reflect the exposure..

Should be avoided to be used for:

Food industry, pulp and paper manufacturing, chemical and pharmaceutical industry and primary metal

For BI, the highest base rate should be used unless we have no bottlenecks and İnterdependencies and good physical separation..

FLEXA Pricing

Modifiers for FLEXA Underwriting: 1. Risk quality 2. Loss history 3. PML or EML 4. Limitations/ modifications in the basic cover 5. Deductibles Loadings:  1. Company general expenses 2 F l i 2. Facultative costs 3. Brokerage

EARTHQUAKE Pricing

Pricing in Turkish market: A tariff imposed by ministry of treasury Tariff prices EQ depending on the following parameters: 1. Location exposure (Munich Re zoning is used) 2. Type of building 3. Deductible

EARTHQUAKE Pricing

Basic rates of Treasury tariff for standart deductible, concrete‐building vs.

Zurich blank rating:

Tariff Pricing Zurich Pricing Munich Re Zone 0  0,29 %0 (per mille) 0,00 %0 Munich Re Zone 1  0,41 %0 (per mille) 0,00 %0 Munich Re Zone 2  0,76%0 (per mille) 0,35 %0 Munich Re Zone 3  1,46%0 (per mille) 1,10 %0 Munich Re Zone 4  2,12%0 (per mille) 2,40 %0

EARTHQUAKE Pricing

What we use at Zurich to come up with “as if” technical pricing and challenge tariff 1. RMS location data is used to price in a more granular way 2. Building age is taken into consideration 3. Type of construction list is extended 4. Number of storeys taken into consideration 5. Existence of soft‐storey is questioned and priced RMS l i i i d i ll h RMS relativities are used to price all these new parameters. 

AOP Pricing

AOP is defined in the Turkish market as: Flood, internal water damage, vehicle impact, Smoke, snow weight, hail, storm, landslide.

At Zurich we have one base rate on all occupancies depending on the sum insured of the location.

The following variables should be priced differently for AOP

on top of the basic risk premium to come up with real technical pricing: Occupancy, exposure, locations, protection and prevention measures

Flood Pricing

Best available tool is Swiss Re CatNet Best available tool is Swiss Re CatNet

Value distribution per sp km is available once we load our policy data Depending on the flood return period assumption a basic risk premium can be obtained.

Definition of TAZ and TAR

• Terrorism Accumulation Zone (TAZ):

– TAZ is a geographic boundary within a high profile city. i.e.

t l

d

one or more postal codes

– TAZ requires careful management of terrorism exposure

accumulation i e data completeness and accuracy

accumulation. i.e. data completeness and accuracy

• Terrorism Accumulation Region (TAR):

• Terrorism Accumulation Region (TAR):

– TAR is a geographic boundary within a TAZ. i.e. separated

by well‐established streets and highways

Purpose of TAZ and TAR

F d li

• For modeling:

– Improvement in analytical efficiency

– Variable Resolution Grid and Simple Damage Footprint analyses are performed for targets in TAZs (and TARs) ‐ more information in the Appendix A and B

– Spider analysis is performed to find exposure concentrations outside TAZs (and TARs) ‐ more information in the Appendix C

– All exposure must be captured regardless of TAZ boundaries for model accuracy. For example, without capturing green dot locations the modeled loss will be underestimated

without capturing green dot locations, the modeled loss will be underestimated

.

. . .

• ZRP compliance

• Underwriting guidelines (referrals, data standards)

• Ease of communication TAZ . _. . _. . . . . . . . .

Istanbul, Turkey

• Yellow boundary includes most mahalles in Besiktas (Beþiktaþ), Beyoglu (Beyoðlu), 

and Fatih (Fatih) • It includes most of Zurich’s exposure, loss potential, and RMS targets TAZ District Insured > 50M loss estimate1 RMS target (v.11) Target circle2 3 Top 5 loss estimates3 1  _{Per occurrence} 2 _{500 di} 2  _{500 meter radius} 3  _{Variable Resolution Grid} 

Istanbul, Turkey

• Yellow boundary includes most mahalles in Besiktas (Beþiktaþ) Beyoglu (Beyoðlu)

• Yellow boundary includes most mahalles in Besiktas (Beþiktaþ), Beyoglu (Beyoðlu), 

and Fatih (Fatih)

• It includes many mahalles with high annual average losses _TAZ

District Target circle2 Top 5 loss estimates3 1  _{Per occurrence} 2 _{500 di} 2  _{500 meter radius} 3  _{Variable Resolution Grid} 

Simple Footprint Analysis

Si l D F t i t il d i i l h d f t i t f h i tt k d

• Simple Damage Footprints are precompiled, generic circular hazard footprints for each main attack mode. Hazard values are represented as concentric rings around the footprint centroid. These values are compiled at various distances, and linear interpolation is used to calculate hazard values between ring radii. Figure 1 highlights the hazard values by ring for a 2‐ton bomb Simple Damage Footprint.

VRG Analysis

VRG (V i bl R l ti G id) l i i i il t Si l D F t i t l i I t d f i

• VRG (Variable Resolution Grid) analysis is similar to Simple Damage Footprint analysis. Instead of using the concentric circles, VRG uses pre‐compiled hazard values at each variable resolution grid. Sizes range from 50m2_{to 50km}2

• VRG analysis uses a blast wave methodology, which considers local building density (shielding effects), and considers building characteristics and wind direction & speed

• Therefore, while Simple Damage Footprints are always circular shapes, VRG shapes vary by attack mode and other factors

Spider Analysis

I S id l i tt k d i i l t d t h f th l ti ithi th tf li d id tifi

• In Spider analysis, an attack mode is simulated at each of the locations within the portfolio and identifies the location that would generate the highest amount of loss

• Spider analysis does not include the effects of shielding, although it does consider primary characteristics, such as construction and building height. They do however include the reducing damage % as the radius of the blast increases

• However, the concentration may not bare a high risk of terrorism attack. We must consider attractiveness and likelihood of an attack at high exposure concentrations. i.e. Their symbolic value and their potential for economic and human loss

• If the exposure concentration is believe to be attractive to terrorists, Simple Damage Footprint analysis is performed at the concentration  location

Segmentation

Segmentation

_Filter • Loss/premium ratio per policy/  occupancy Account E Account A Account C Account B A D Account F Account G Account H Account I Account J I  Standardized  occupancies Account D Account G Analysis of portfolios and  reallocation of accounts to  loss/premium ratio II _Account D Account  E Account F Account B Account A Decision making process on the  threshold to allocate segments III Define the Retention and GWP targets for  each segment based on agreed overall  strategy and rebalance“ of segments IV

strategy and „rebalance  of segments

V Performance reporting and continuous 

GEOCODING

GEOCODING

GEOCODING

Converting the standart address data into longtitute and

Converting the standart address data into longtitute and

latitude

BENEFITS of GEOCODING

• Standardisation/ improvement of address information for CRM

and mailing costs

and mailing costs.

• Better accumulation control for EQ, flood and terrorism risks for

better management of CAT Treaty and improvement of

underwriting decision making process.

• OTHER SOLUTIONS

• OTHER SOLUTIONS

Using google fusion tables.