Episode 96: Excess Casualty

My guest for Episode 96 is Don Grimm, FCAS, Principal and Consulting Actuary at Archer Actuarial Consulting.

The theme for the episode is 𝗘𝘅𝗰𝗲𝘀𝘀 𝗖𝗮𝘀𝘂𝗮𝗹𝘁𝘆.

Don and I explore the following topics:⁣

✅ The connection between excess casualty and primary lines
✅ Target classes of business and coverage scope for excess casualty
✅ Capacity, rate dynamics, and trends in the excess casualty market
✅ Key differences between excess casualty and umbrella insurance
✅ Tradeoffs between excess casualty and reinsurance
✅ Evaluating attachment points and limits for excess layers
✅ Unique risk dynamics and exposure attributes for excess casualty
✅ Risk loads for casualty lines of business 
✅ The life cycle of an excess casualty program
✅ Actuarial reserving considerations for excess casualty

If you work in property and casualty insurance, especially on the liability side, you want to listen to this.

My Website: maverickactuary.com

Episode Transcript

Speaker 1 (00:00):
Welcome to episode ninety six of Live with the Maverick.
My name is Dominic Lee, founder of Maverick Actuary. We
are a content community. Our mission is to maximize the
impact and value of QUAN professionals on a global scale.
The goal of this series is to educate our community

(00:21):
on the most relevant themes in actuarial science, risk management,
and analytics. The theme of today's discussion is excess casualty
and we are very excited to have with those our
guests for today's episode, Don Grimm. Don is Principal and
consulting actuary at Archer Actuarial Consulting.

Speaker 2 (00:40):
Welcome Don, Oh, thank you, Dominic.

Speaker 1 (00:43):
Great to be here, great to have you, and you know,
good to see you posting one of the few active
posters on LinkedIn and the actuarial community. So that's how
I kind of caught wind of Don, and you know,
thought it would be good to reach out. This is
this is a topic that I think is very interesting
and one of the topics. You know, one of the
things we tried to do on the podcast is talk
about some of the topics that you know, you kind

(01:06):
of just easily google that sometimes requires some more involved discussion.
So I think this will be a very interesting conversation.
So good to have you done, and just love to
give an opportunity to introduce yourself.

Speaker 2 (01:18):
Yeah.

Speaker 3 (01:19):
Likewise, So my name is Don Grim. I'm an actuary.
I've been an actuary working in the field for about
thirty years. I got my start at Signa, which is
now part of Chubb, kind of by accident. I feel
like back then a lot of actuaries didn't necessarily go
to school to be an actuary and kind of fell
into it. I got lucky because I was a math major,

(01:43):
really not knowing what I wanted to do, and there
was a part time job posting at my college and
I applied for it, and it turned out I was
the only one that applied for it, and I got
a call a couple of weeks later and they said, well,
we didn't think you're very qualified, but you're the only
one that applied. So that was fine with me because

(02:05):
it was like twice what I was getting paid whatever
I was doing.

Speaker 2 (02:09):
So that was my beginning in the actuarial field.

Speaker 3 (02:12):
And and then I started there full time after college
and uh, you know, kind of moved around between insurance
companies and consulting.

Speaker 2 (02:23):
And mostly in loss reserving.

Speaker 3 (02:26):
My most recent role in the insurance industry was his
chief reserving actuary for Harleysville Insurance and then seven years ago,
almost to the day, I started Archer Actuarial Consulting and
it's been quite an adventure. I've learned a lot and

(02:46):
doing a lot of work that I didn't expect to
be doing. So it's it's been really fun.

Speaker 1 (02:51):
Yes, I always love hearing about the stories about how
everyone got there with in the industry. I think they're
very different depending on the person. So hey, however you
get your foots in, it doesn't.

Speaker 4 (03:01):
Matter right exactly.

Speaker 1 (03:04):
Yeah, So, you know you mentioned that you of course
you you have extensive industry experience and you were in
a few different companies. I know you have I think
your own consulting shops. So you know what got you
into you know, independent practice and you know how describe
your current role on your company.

Speaker 2 (03:23):
Yeah.

Speaker 3 (03:23):
So I had worked in consulting and having my own
practice was something that I always wanted to do. It
was kind of always in the back of my head.
It really took a lot of confidence to be able
to go out on my own and start my own thing.
And for anybody interested in doing that, it's very rewarding
and also very challenging. And I still remember the time

(03:48):
that I sat down to work on a project from
my first client and opened a blank Excel worksheet.

Speaker 2 (03:53):
You know.

Speaker 3 (03:54):
It wasn't like, well, let's update some other project. It's
literally like a blank a blank sheet, and so it's
kind of building from the ground up. So yeah, Archer
actual Oial, I provide kind of your typical P and
C actual oial consulting services to insurance companies and self insurance,

(04:15):
and I've gotten to work on a lot of interesting things.
I did some expert witness testimony last year in a
criminal trial, which is very interesting, and I support one
of my clients is a telematics provider, So it's kind
of not your typical standard actual oial work but a
little outside the norm, but you still get to apply

(04:37):
a lot of the same principles. So yeah, And what's
happened most recently you mentioned the LinkedIn posts. You know,
I just started posting some basic actuarial one on one
type of stuff on LinkedIn because I've found that if
you're a non actuary and you want to learn a

(04:57):
simple actual oial concept and you google it, you're probably
going to get like a paper from the CIS Casually
actu Royal Society, and it's going to be very complicated
and you're probably not going to read it. So I recognize, well,
there's a niche here for just sharing basic, actual, one

(05:17):
on one information and I've kind of parlayed that into
some training opportunities where some companies have reached out to
me to provide just basic actuyal one on one training
for non actuary so they can understand the principles without
you having to go through the technical process.

Speaker 1 (05:38):
And I love that last point because we spoke about
this in the pre meat is that and that's honestly
one of the reasons for the podcast as well, is
is I phone that there's a gap, a content gap
in the actuarial market where like you said, you can
look it up online, but you're most likely to run
into a very technical paper. So when you want you
want some of these concepts explain in very plein spoken language,

(06:00):
iPhone to be a challenge, So that's I like to
think that's one of the gaps that we're trying to feel,
especially for some more and more nuanced topics like excess
casualty you know.

Speaker 2 (06:09):
Yeah, absolutely.

Speaker 3 (06:10):
And what's interesting is just from my perspective, from sharing
this type of information, even though it's you know, typically basic,
actual real information, when you're tasked with explaining it to
somebody that doesn't understand, you know, maybe all the fundamentals,
you really really have to understand it yourself and be
able to digest it and express it in a way
that that somebody that doesn't have all your the information

(06:32):
that you have can can understand it. And so through
that teaching process, I've learned a lot and it kind
of surprised me from having worked in the field for
so long. You get to the point where you kind
of feel like you know everything. But just explaining things
in different ways is rewarding in itself.

Speaker 1 (06:54):
Especially when you have to put in short form, right. Yeah,
I can imagine that that's a child I mean for anyone,
that would be a challenge.

Speaker 2 (07:01):
Exactly.

Speaker 3 (07:03):
It's easier to write a long paper about a topic
than it is to write a short one.

Speaker 4 (07:09):
Yeah.

Speaker 1 (07:09):
So yeah, that's one of the challenges I like with
LinkedIn to is to your point, when you have to
explain something in short a short enough version that people
who still hold peoples attention and you're not writing too long.
You have to be very succinct, and like you said,
you have to really understand the topic. So I think
that's a good skill for all, not just actuaries, but
for professionals to have, you know, absolutely, Yeah.

Speaker 4 (07:31):
So let's get into the topic. You know.

Speaker 1 (07:32):
So excess casualty very fascinating subject, and I imagine that
certainly people who've been in property and casualty for some
time maybe familiar with it, but a lot of the viewers,
whether they're younger viewers or people in other disciplines, may
not be as familiar with it. So how would you
describe excess casualty?

Speaker 3 (07:52):
Yeah, so excess casualty or excess liability just the same
name for a different thing. It's it's just another type
of thing insurance coverage that property and casualty companies offer.

Speaker 2 (08:04):
It's usually on in the.

Speaker 3 (08:05):
Current form, and it's designed to extend the limit from
an underlying coverage. So if you purchased an autoliability policy
and you have, say a million dollar limit, but we
all know there can be accidents that wind up costing
more than a million dollars and you don't want to

(08:26):
essentially self ensure that yourself. You would go and buy
an access policy or that's one of your options, and
you can add typically I'm not going to say as
much limit as you want, but most major companies will
offer an additional twenty five million dollars of limit, So
you're essentially extending the limit of the underlying primary coverage.

(08:49):
And that can be for auto, it can be for
general liability, workers compensation, some of the professional liability lines.

Speaker 1 (09:00):
No, the natural extension of that question is, and I'm
reminded of this, it's like when you think when you
think of insuran, when the average person thinks of insurance.
If you're not an expert, if you're more just like
a you know, personal lines purchaser of insurance, wrapping your
mind around the need for limits greater than a million,

(09:21):
that's certainly far into many people. And I remember one
story I remember is when I was in my first company.
We're doing a screw project and we were working with
people in different disciplines and I think it was someone
in operations. They were either operations or finance, and I
was telling them about the claim. This is a property
claim that I came across because there's like one hundred
and fourteen million, there's a property can't claim of course,
and they couldn't wrap their mind even though they were

(09:41):
working for the company. They thought I was joking. They
didn't think that you could have a claim of that size,
and of course that was property.

Speaker 4 (09:47):
But similar concept. So you know, the natural question is
like who needs.

Speaker 1 (09:51):
This type of coverage, you know, like whether that which individuals,
which class of business, which type of clients?

Speaker 4 (09:57):
You know, who needs like these kind of limits.

Speaker 3 (10:00):
Yeah, so access is mostly for commercial insurance. There's a
similar concept. We can talk about umbrella, which is more
for personal personal lines, not exclusively, but it.

Speaker 2 (10:13):
Tends to be that way.

Speaker 3 (10:14):
So pretty much any business they do have a so
primary limits tend to be up to a million dollars.
All right, those are broad statements, but typically if you
bought a worker's comp or were not workers compt because
there's that's unlimited, but general liability policy, it's going to

(10:34):
be a million dollar limits. So if you're a business,
somebody slips and falls, or the auto exposure, it's easy
to have exposure over a million dollars, especially in this
environment with you know, you hear of nuclear verdicts and
just kind of crazy crazy outcomes. A million dollars doesn't

(10:56):
sound like a lot of money compared to some of
the outcomes. So to answer your question, pretty much, any
business really needs to ensure over a million dollars unless
they're small enough that they're just going to kind of
take the risk that if we get a claim bigger
than a million dollars, maybe that's the end of our business.
And sometimes that again, that's a calculated risk that a

(11:17):
company is willing to take. But any medium or large
sized business they have to do the kind of the
cost benefit analysis and take that a little bit more seriously.

Speaker 1 (11:28):
Would you would you say that there's also an industry
dynamic to that, So do you see any like whether
you want to call it a bias, or you see
some industries purchasing it more than others? And also maybe geographically,
I know, for instance, liability in the US tends to
be more of a thing than in other parts of
the world. So when you think of industry and geography,
do you see any that are any areas where it's

(11:50):
more common than.

Speaker 3 (11:51):
Others As far as the industry goes, I mean, I
think it's mostly pretty proportional to the type of to
the risk. So like, as an example for auto, if
you have a business where kind of an extreme example,
you're a fuel delivery business, you know, that's a much

(12:15):
higher risk profile than if you're you know, your uber
or something. Either one of those people could get in
an accident it results in more than a million dollars
of damage. But if you're driving a fuel truck and
you know, they're big, heavy vehicles that can explode, that's
much more risk. So I guess I would say typically

(12:39):
most companies that purchase excess and the limits that they're
deciding to purchase, there's some consideration of the actually their
actual exposure to very large losses because at the end
of the day, excess is designed to cover very large losses.

Speaker 4 (12:56):
Yeah, that hope that's helpful.

Speaker 1 (12:58):
Now when we take a step back, when I think
of different lines of business, we've only done one other
line of business episode, But I think it is helpful
to think of the broader market as you would with
anything else in the economy. So when you think of
excess lines excess casualty, what does a market for excess
casualty look like today?

Speaker 3 (13:16):
Well, the rates are going up dramatically, and maybe we
can talk about this in a bit, But like in
the LinkedIn post, I referred to excess casualty as extreme
insurance because pretty much all aspects of it, all of
the risks that you underwrite when you write a policy

(13:39):
or P and C insurance, all of those risks are
exaggerated when you're talking about excess insurance. And there's also
this so you have the potential for much larger claims.
And there's also a lot of latency, so you could
be incurring very large claims and not knowing about them

(14:02):
for many years.

Speaker 2 (14:05):
Actually, so well, I forget the original question.

Speaker 1 (14:10):
Yeah, it was just more like the market when we
think of like you said, you were talking about whether
it's hard our stop. You said that it sounded like
there was a hardening of the market, Like what you know,
what does capacity look like? Just a couple of those
fundamental things.

Speaker 2 (14:22):
Yeah, thank you.

Speaker 3 (14:24):
Yeah, So the rates are going up pretty dramatically in
the market, and I think we all kind of know
inflation has been a big deal the last few years,
and then there's this period where the insurance companies are
kind of catching up. So we're still seeing big rate increases,
say in the autoside. So autoliability, well excess by its nature,

(14:48):
it has even more latency. And by that I mean
so if you had an auto claim, you're probably going
to know about it. If you had a really big autoclaim,
you're going to know about it pretty quickly, and you're
going to be able to respond to that. If you're
an insurance and builded in the rates but excess, you
don't really know what's happening in your current portfolio because
there's so much latency. So what I'm seeing is very

(15:12):
large rate increases. Because there's this leveraged impact of inflation
in the excess layers and there's this lag it takes
insurance companies a little bit longer to actually see what's
happening in the portfolio and then decide, Okay, we have
to raise the rates by a certain amount to become
profitable again.

Speaker 2 (15:33):
So it's a tough market right now.

Speaker 3 (15:34):
There's a lot of forces inflation, social inflation, all the
pressure from litigation that are all kind of the perfect
storm that are that are increasing rates. I think there's
still a decent amount of capacity, but you know, the
the excess.

Speaker 2 (15:52):
Carriers are definitely looking for more money. And they you know,
the results seem to indicate that they need to do, so.

Speaker 4 (16:00):
That's a good of review.

Speaker 1 (16:01):
One of the things I noticed, actually we spoke about
before is I actually did on an article on excess
and surplus, so that would include surplus lines, which is
for those of you may not be familiar insurance for
like when you can't get it in the standard market.
And it actually took a look at the market in
terms of they looked at the ratio of the director
and premium for excess and surplus combined over the standard market,

(16:24):
and they found that the ratio was increasing in the
in the most I think five recent and years. And
you know, so I was just curious about that, like
how much. And you raised a good point in that
some of that could be that the disproportionate rate increases,
but also some of it could just be that there's
less capacity in the in the primary market. So I think,

(16:45):
you know, that's an interesting observation. And like I said,
that was for both excess and surplus, so it sounds like,
you know, specifically for excess, it could be one of
those two things that are both.

Speaker 3 (16:56):
Yeah, I think all those factors are contributing and if
you think about the the impact of inflation, it just
keeps pushing more and more of the exposure into higher layers.
So just over time, if you you know, we tend
to keep this million dollar nice round numbers a primary limit,

(17:17):
so that that's like a fixed amount, but over time
a million dollars isn't what it used to be, so
a higher portion of the total loss keeps going into
the into the excess layer and less than the primary
And when there's low inflation, that tends to be hardly noticeable,
but more recently it has more of an effect.

Speaker 4 (17:38):
Yeah.

Speaker 1 (17:39):
Good, No, you did talk about umbrella insurance earlier, and
I think this is a really interesting one of you know,
when we think of excess casualty, it has similar attributes
to to umbrella insurance or primary lines, and and even
reinsurance as well.

Speaker 4 (17:53):
So let's start with umbrella.

Speaker 1 (17:55):
You know what one of the key differences between excess
casualty and umbrella insurance.

Speaker 3 (18:01):
Yeah, okay, So excess casualty, I would say, it's more
for commercial lines. It's so it's more of a business focus,
and it's primarily designed to extend the underlying policy limit,
so it doesn't provide more a broader scope of coverage,
it just extends the limit.

Speaker 2 (18:23):
Generally.

Speaker 3 (18:24):
Umbrella on the other hand, that can be for commercial lines,
but you might hear a bit more often for personal lines,
and umbrella not only extends the limit, but it extends
in some ways the scope of the coverage, including it
can sit over over multiple coverages. So in excess, if

(18:48):
you have a commercial auto policy with million dollar limits
and you want five million dollar limits, you go out
and buy a one million or a four million excess
one million policy, So that just directly extends your limits
for the auto policy. But as a for personal insurance,
there's a lot of people who are homeowners and also

(19:10):
own cars, and they don't have to go out and
buy two separate access policies. They can just buy something
called an umbrella policy. And as an example, if they
had a million dollar liability limited on their homeowners and
I'll say three hundred thousand dollars on their auto liability,
they can buy an umbrella policy various limits, but they

(19:34):
could buy say another million dollars worth of coverage, and
if they have a loss in their homeowners or their autoliability,
that umbrella policy will respond to either one. So it's
more than just access. It's like a more of a
it brudens the scope as.

Speaker 1 (19:51):
Well, and something that I've seen and Kurt me if
I'm wrong, certainly because I spent some time in personal alliance,
I would I wouldn't say I was an expert in
umbrella with I got some to it. Sometimes actually would
drop down and actually cover filling coverage gaps as well,
so there could be claims that they're not neither auto
or home, so you could actually fill in gaps where

(20:12):
the coverage is and I think very clearly defined.

Speaker 2 (20:15):
Yeah, exactly.

Speaker 3 (20:17):
I was going to mention that, and then I was
afraid you'd ask me for a specific example, so I didn't.

Speaker 2 (20:22):
I can turn that around on you.

Speaker 1 (20:25):
I could give I could give an example, but believe me,
it would probably take us.

Speaker 2 (20:28):
Like fifteen minutes, so we won't get into details enough.

Speaker 1 (20:32):
One photo about it on that is based on your
experience working with excess lines, you know, was it more
common for the excess coverage to be provided by the
same carrier as a primary or did you also see
cases where the excess was offered by a different carrier
in the primary market.

Speaker 4 (20:50):
Based on your experience.

Speaker 2 (20:52):
Yeah, I guess.

Speaker 3 (20:53):
Well, based on my experience, I would say it's usually
the excess coverage is provided by the same ensure that
the primary policy, and it's kind of considered pretty risky
if you don't do that. So if you're an insurance
company and you write access on top of another company's

(21:13):
primary policy, uh, there's a lot of information that you
don't have, and you might not even know of potential claims.
So it kind of increases the latency. It just decreases
the amount of information you have for to deprice the
stuff accurately and reserve it accurately. But there are cases

(21:34):
like in the you know, in the E and S market,
where there's just not companies willing to write certain things,
so you do have to go to that market and
get coverage from different providers.

Speaker 4 (21:45):
Good.

Speaker 1 (21:46):
So, yeah, we you know, we talked a bits about Umbrella,
but I also did mention some of the similarities with reinsurance,
and I think this is actually quite interesting, you know,
me being especially when I got to commercial ACONCA, I
think like I started to study insurance a bit more
careful because you kind of have to get it's a
little bit as you know, less homogeneous, is a bit
more heterogeneous. So it's like, I feel like, no two

(22:08):
policies are really the same. So when we think of,
you know, like the what are the fundamental differences between
you know, purchasing an excess policy or excess casualty in
the primary market versus purchasing reinsurance in the reinsurance market.
Then the example that ill uses if you have let's

(22:29):
just say, if you have a commercial insurance a business
that requires you know, six million dollars in coverage. There's
a couple of ways that that coverage can happen, and
the insured we'll see the same coverage structure will be different.
So the first example I think of is having you know,
a million dollars in primary limits and then five million
in excess, so it'd be like a million primary and

(22:49):
then a five x one. But another example is if
you know the company the primary company absorbs is the
six million, but then they decide to see that see
the top five and limits of the reinsurance market. So
in my mind, at least that the insurance is receiving
the same coverages, just that the coverage is structured in
different ways. So how do you think of, you know,

(23:12):
the fundamental difference is between you know, those two types
of arrangement, you know, the same amount of coverage, but
structured in an excess way versus in primary versus you know,
in include incorporating reinsurance.

Speaker 3 (23:26):
Yeah, so I guess I generally think of reinsurance as
being specific for insurance companies. But that being said, it's
easy to form a relatively easy to form a captive
insurance company these days, So there are a lot of
businesses that form a captive so they are an insurance company,

(23:47):
so they now have the ability to go to the
reinsurance market instead of access buying access insurance.

Speaker 2 (23:56):
So I guess I would say the biggest.

Speaker 3 (24:00):
Difference, well, there's the kind of the regulatory aspect where
excess insurance is regulated more than reinsurance, because reinsurance is
those are business the business transactions, and they should involve
very sophisticated buyers and sellers. Not necessarily true if you

(24:22):
are a company that's not in the insurance business that's
purchasing access coverage. So the regulatory aspect is one, and
then just your status of whether you're an insurer or
reinsurre is another.

Speaker 2 (24:37):
And then I do think that reinsurers have an incredible
amount of flexibility and how they can structure arrangements.

Speaker 3 (24:45):
They can easily carve things out, how they treat expenses,
carving out certain risks or classes that they don't want.
So there's basically reinsurance contracts. There's almost no such thing
as and reinsurance contract. They're all customized, so you have
a lot more flexibility if you were to go to

(25:05):
the reinsurance market. Yeah, that's kind of how I see
the key differences.

Speaker 1 (25:12):
I would imagine that pricing is is a consideration as well,
because I know, I think we spoke all this as well.

Speaker 4 (25:18):
You talked about the fact that.

Speaker 1 (25:19):
Expense loads, risk loads, commissions could be different regardless of
which arrangement that you choose. And also I would think
also maybe capacity in the reinsurance market as well. Do
you think so would that be a fair assessment that
those are a couple of considerations as well, which you determine,
you know, whether it's place of access policy or you know,

(25:39):
seated as reinsurance.

Speaker 2 (25:41):
Oh yeah, absolutely.

Speaker 3 (25:42):
And companies, you know, insurers and reinsurans, their risk appetites
can kind of change quickly, and you know, capacity can
dry up in one area and you know, maybe on
the reinsurance side, but not on the excess side.

Speaker 1 (25:55):
So yeah, yeah, no, and something else that that I
thought of. And so when I was in commercial lines,
I spent four years in commercial lines, I spent well,
technically six if you include my specialty, but in terms
of like the core commercial lines. So I spent two
years in commercial property, sorry two in jail first and

(26:15):
then too in commercial property. And when I was in jail,
it wasn't as much of an issue, you know, I
don't think there was as much of issues with social inflation.
But when I went to commercial property, what started happening,
and I just kind of heard it through the meetings
because we were on the same team, is that the
limits started to get puers more so similar concept to
what you talked about with inflation, with a million you
know no longer being sufficient, so the you know, so

(26:37):
we would both So what we see more commonly is
that you'd have like a policy with a million per
currents two million aggregate, you had more policies being sold
that we're two million per currents formulate agree, even though
there were still you know, less common so like, so
the question I have is when we talk about attachment

(26:58):
points and limits. That's obviously very key to access casualty
when you think of the excess layers. You know, so
kind of what are the key considerations in evaluating limits
and attachment points for excess coverage? And you know, are
there are there? Are they more driven by the you know,
the insurer versus the insured because I imagine of course
ensured has some kind of appetite for what coverage they want,

(27:20):
but the market itself, of course is going to impact
that in terms of what capacity. And you know, so
how do you think of that? Uh, you know, key
considerations for evaluating attachment points and limits?

Speaker 3 (27:32):
Yeah, well, so I guess there's the perspective of the
buyer and the and the insurer the seller.

Speaker 2 (27:40):
The attachment point is kind of the easy one.

Speaker 3 (27:42):
Because it's it's whatever it is on a on a
primary basis. You know, it's kind of just very common
to have million dollar limits, especially in the commercial side.
So then the question is like, okay, well how far
do you want to how much additional insurance do you
want to purchase? And I guess one of the key

(28:06):
considerations is that the higher and limit that you go,
the more premium you're paying.

Speaker 2 (28:14):
For risk load, so.

Speaker 3 (28:18):
You know there's a lot more uncertainty. So let's take
an example. You know, if you just want an extra
million dollars on top of your million dollar limit, that's
one thing the insurance company is going to say, Okay,
there's there's certain risk inherent in that.

Speaker 2 (28:31):
But once you're going up to.

Speaker 3 (28:32):
Twenty million, twenty five million, the insurance companies just don't
have enough experience. There's so much uncertainty they're putting really
big risk loads on it. So then is the buyer
you have to look at that and determine, like, well,
how important is it? What's what do we think our
chance of having a claim that's over say twenty million dollars,

(28:54):
what would happen to our business?

Speaker 2 (28:55):
Would that be?

Speaker 3 (28:56):
Is that a survival risk for our business? And then
kind of do a cost benefit analysis. A lot of
times the excess coverage isn't as expensive as it can
look cheap sometimes compared to the primary because the probability
of getting in that layer is usually very low. But
more and more it's going up, and I'm sure companies

(29:17):
are looking at it and you know, doing the cost
benefit analysis whether they really need to buy this.

Speaker 1 (29:26):
Does a follow upon that, would it be fair to
say that for the same amount of limits, the higher
that your attachment point is, that the lower that you'd
pay us. Given that you're attaching at a higher point
and there's a lower probability of hitting it, would that
be a fair assessment or Yeah.

Speaker 3 (29:42):
That kind of reminds me of like the ILF increased
limit factor relationships, where in order to get to the
twenty five million, you have to go through the twenty million,
So therefore the twenty to twenty five million dollar range
is less probable. But the but you're putting out a
lot of you know, potential, there's a lot of exposure

(30:04):
for relatively little premium. So that's where the insurer says, Okay,
well we're going to increase the risk clad.

Speaker 2 (30:12):
Yeah, yeah, Okay, that's hopeful.

Speaker 1 (30:14):
No, you know, we talked about excess casualty of course
being in some ways the unique line of business because
given some of the high layers that you're dealing with, So,
what are some examples of unique risk dynamics and challenges
for this line of business?

Speaker 3 (30:31):
Yeah, so that is where we were talking about it
kind of like all of the risks are are exaggerated
in access, So I don't think I actually said this,
but you know, by definition, this coverage is a low frequency,
high severity line, so you don't get many claims because

(30:52):
there's not there's relatively few claims over say a million dollars.
But by definition, if you have a claim that's an
excess claim, it's a big claim. So you don't have
many claims, and the ones you do are very large,
so that that makes it difficult to price excess coverage

(31:17):
accurately because you have relatively few claims to base it on.
The other unique characteristic is that it is the latency
that I mentioned. So as an example, it would not
be unusual to find out as an excess carrier that
you have a ten million dollar claim four years after

(31:41):
it happened. There could be a period where, well, there
was a claim reported, but the you know, the defense
attorneys who are pretty optimistic, Oh it's it's gonna we're
gonna be able to settle this for five hundred thousand dollars.
It goes to trial or you know, or settlement, whatever happened,
and it's a really big claim. So this latency, you know,

(32:04):
it's obviously I call it extreme insurance because with just
normal P and C insurance, you don't know the cost
of your product when you sell it, but you find
out pretty quickly and you can adjust the rates accordingly. Well,
something like excess, you might find out the true cost
of the policies that you wrote in ten years, so

(32:27):
you have to really you have to get it right
the first time, and that's it's hard to get it
right because there's just not that.

Speaker 2 (32:33):
Much information out there.

Speaker 3 (32:36):
So basically all the risks inherent and insurance are exaggerated
in excess, including with inflation. So I'll give you an
example with inflation. So say you had a you had
a two million dollar claim. So if you had a

(32:58):
two million dollar claim and you had access coverage, a
million dollars would go to primary and a million dollars
would go to Access. Okay, and then we have a
lot of inflation, and just to keep it simple, with
ten percent inflation. So now that two million dollar claim,
say the next year there's a new two million dollar claim,
but it's not really two million, it's two point two million. Well,

(33:22):
a million goes to primary, so no change there, and
now a million.

Speaker 2 (33:27):
Two goes to access.

Speaker 3 (33:29):
So if you look at the difference, that ten percent
inflation resulted in a twenty percent increase in the access
So that's one example of where the risks are are
leveraged or the excess coverage. Trying to think of some
other other risks, but pretty much, you know reserving, it's

(33:53):
very difficult to reserve for it because you don't have
the information. So that's a risk and the pricing and
another one would be like a scope risk. So if
you think back to all the policies that were written
before nineteen eighty five or eighty six, whenever there was

(34:14):
some key date with respect to asbestos, before they were
excluding asbestos.

Speaker 2 (34:20):
I might not have that date right, but.

Speaker 3 (34:24):
You know there there were a lot of policies written,
including access policies that covered asbestos, where nobody even knew
that was a risk. So essentially, if you think about
the policies that are being written in access today, there's
coverage being provided for risks and losses being incurred for
risks that nobody even knows about, and so that latency

(34:48):
is kind of the reason that it leverages that scope risk.

Speaker 1 (34:54):
When you mentioned the inflution example, the leverage inflation, I
was thinking, I think it was an exam, one of
the exams where you have to do the expected VI
you and come up with the inflation. And I think
that that example is kept coming up. So that's a
good good reference there, good callback. So yeah, you know,
those are some examples of environmental factors and also functional
things pricing reserving itself.

Speaker 4 (35:16):
When we think of.

Speaker 1 (35:17):
Expos specifically exposure attributes, I'm curious to know, you know,
are there any unique exposure attributes that drive claim experience
for excess casualty? So, for instance, if you think of something,
a simple example would be like property cat claims. Of course,
if you are a coastal risk, you probably at the
higher likelihood of being exposed to cat losses. So is
there anything unique to access casualty? I imagine that to

(35:40):
some extent it would just follow the underlying liability line
of business. But is there anything unique to access that
something about a particular risk that may increase the likelihood
of an excess claim?

Speaker 3 (35:53):
Yeah, you know what, that's a that's a tricky one
because I do like the easy answers that it kind
of follows the exposure from the primary, But there certainly
are some like back to that fuel truck delivery you know,
the probability of having a two hundred thousand dollars claim

(36:14):
for this fuel truck delivery might.

Speaker 2 (36:16):
Not be that much different than I don't know, just
a regular truck.

Speaker 3 (36:22):
But the regular truck doesn't have any chance of twenty
five million dollar loss because it's not going to blow
up somewhere, So.

Speaker 2 (36:29):
That would you know something like that.

Speaker 3 (36:31):
There probably are unique risk profiles for certain exposures where
they have an increased probability of exceptionally large claims. But
if you just looked at their primary you know, kind
of like smaller claims, they might not necessarily be completely different.

Speaker 1 (36:53):
Okay, yeah, that's helpful, I mean, and that's interesting to
know because my initial assumption was that they just followed
the primary. But it's good to know that you could have,
you know a couple of cases where you know, there
could be some unique exposure attributes there no something that
we yeah, go ahead ahead.

Speaker 2 (37:10):
Yeah sorry.

Speaker 3 (37:12):
I think in general that is the assumption in pricing
a lot, because there's even like some of the modeling,
the curve fitting, it starts with the information that you know,
so losses that are say zero two million dollars are
the basis for extrapolating these actual large losses, so that
that kind of is implicitly assumes that those characteristics are

(37:35):
uniform throughout the entire range of values. But you kind
of challenge me to think of an example where that's
not necessarily true, and I could see that that assumption
is probably, you know, not always the case.

Speaker 1 (37:49):
Yeah, but I think it also makes it interesting. There's
only one reserve of view I was involved with for umbrella,
and I also I think I was briefly involved with
pricing for excess on a more limited base of the
think it was with the context of specialty. And to
your point, it does make things of it interesting because
it's not just something linear that you're you know, you're
applying a very simple equation, you're making assumptions on it,

(38:10):
they're you know, there's all there's allso art. I find
too when you get into the excess realm, it's not
just like science. It's not just like formulaic and equation based.

Speaker 2 (38:19):
Yeah, definitely.

Speaker 3 (38:20):
And and if you find that it is just formulate
an equation based, you're probably going to be in for
a big surprise at some point. Just you know, actuaries
are very good at modeling things, and it can be

(38:41):
very humbling when you're talking about, you know, trying to
model access insurance because there's so little information and it's
important for actuaries to draw conclusions based on incomplete information.

Speaker 2 (38:53):
That's that's part of the art of what we do.
But you really have to.

Speaker 3 (38:57):
Have the humility to realize that, you know, these estimates
could go all sorts of ways, and not to get
too overconfident, and not to communicate them in a way
that's over confident, because you know, management, if if a
portfolio looks profitable based on the actuaries estimates, management is

(39:18):
going to be happy to you know, kind of double
down and start writing more business. Uh, And then you
don't want to go back and find out like, well,
it was a really cool model and.

Speaker 2 (39:29):
You know, it took a long time to learn and everything.

Speaker 3 (39:31):
So I had too much confidence in it because it
was you know, fancy sophisticated model that only a handful
people can understand. So it is it definitely is a
balance between the art and the science and pricing and
reserving for lines like this.

Speaker 1 (39:49):
Yeah, one thing that might be helpful and I think
we spoke about this before. You told me that you
did oppose at one point where I'm not sure if
it was video or a short format, it might have
been a video where you talked about the life cycle.
You kind of broke down the life cycle of an
excess program.

Speaker 4 (40:04):
So talk us through that.

Speaker 1 (40:05):
I think that might help us to understand is the
evolution of the claims, where the direction in which they move,
and kind of some of the key considerations there.

Speaker 4 (40:13):
So, so whole you.

Speaker 1 (40:14):
Describe to life cycle of on an excess program.

Speaker 2 (40:17):
Yeah, so.

Speaker 3 (40:19):
I don't actually have a video, but I am working
on one. So the example that I want to give
is of an unprofitable program, and the reason I want
to pick on I'm gonna I'm kind of going to
pick on excess casualty here and talk about a program
that you know is unsuccessful, because if I talk about

(40:40):
one that is successful, it really doesn't highlight any of
the risks. It's just a happy story. So the timeline
suppose you're an insurance company and you want to start
a brand new excess casualty program. So you don't really
have any information. So the sources of information that you

(41:01):
can use you could go to your primary book and
kind of what we're just talking about you can look
at the experience from your primary book and then extrapolate
to higher layers. And when I say extrapolate, you know
it's actuaries have methods to fitting curves to the data,
so they can fit curves to severity data, average loss size,

(41:23):
and if the biggest loss you have is a million dollars,
that doesn't necessarily stop you from extending that curve, extrapolating
it into higher layers, and you can use that as
a basis for pricing for your program. There's also places
like ISO Insurance Services Organization that have ILF curves that

(41:46):
you can use, but it's generally hard to find industry
data for exposures like this. So you're beginning your program,
you're kind of flying blind. You're writing policies. You know,
you get this new program a little bit of having

(42:07):
your fingers crossed and just you know, hoping that your
assumptions are valid. Well for the most part, you're going
to go this program is going to be in a
honeymoon period for a couple of years. The claims aren't
really going to come in, so it takes a long
time for the claims to come in. And say you're

(42:28):
one year after the beginning of the program, you might
have a few claims reported, and of those claims that
are reported, you may or may not have any type
of handle on what their potential value could be because
a lot of these big claims just take a really
long time in the discovery process. So point being, after
a year, your program is going to look very profitable

(42:49):
all premium, hardly any loss, and then the actuaries are
tasked with coming in and determining what the ultimate loss
ratio is. So that's going to determine the profit of
ability that program in year one.

Speaker 2 (43:02):
Well.

Speaker 3 (43:03):
As a reserving actuary, they need information. If they have
no information, they have to more or less default to
the original assumptions that underlie the pricing. So you have
a little bit of this circular logic going on where
the reserves are set based on the original pricing assumptions.
So at the end of the day, in the absence

(43:24):
of actual claim information, after a year, your program is
as profitable as you predicted it would be. Because it's
just the way that everything works. You're relying on your
initial assumptions, so it's a self fulfilling prophecy. So what
happens year two program looks pretty good. Well, you might
start increasing premium a little bit, and again at the

(43:47):
end of the year two, you're probably not going to
have much information on claims, so it's still going to
look really profitable. So that honeymoon period can go on
for a few years be abruptly stopped if you find out,
like books, we got a twenty five million dollar claim, like, well,
this is serious. We're going to have to go back
and reevaluate things. But they're in my example of this

(44:11):
unprofitable program, there's certainly a chance you get through a
few years with you have big claims, but you just
don't know about them, and you're defaulting to your original assumptions.
You're increasing premium, you might even be lowering rates because
the program looks so profitable, so you know everything's headed

(44:33):
in the wrong direction, but you don't know about all
the losses you have incurred. So after a few years
in this kind of sad example, let's say you get
to about five years in the program, that's when you
have a chance of actually knowing about some large losses

(44:56):
and then saying, well, this probably wasn't as profitable as
we thought. We need to increase rates, and then you
get into the cycle where you're increasing rates and essentially
tightening the belt, so you're being more selective on risks.
So you can get into this cycle where now you're

(45:17):
reducing your premium because you're increasing rates and kind of
some of your best policyholders are leaving, so premiums going
down all the while all the losses that you didn't
know about are starting to come in. So from a
calendar periods perspective, the program went from all premium, no

(45:39):
losses to all losses not as much premium, So you know,
it looks it can look abysmal, and you know that
can take anywhere from like five to ten years before
before a company can really assess the profitability of an
excess program. That that's a life cycle one where it

(46:01):
starts and then ends, you know, kind of drives over
a cliff. Just to you know, emphasize the risks involved.
You know, the latency is is a real key one
and the fact that they're there's not a lot of losses,
but the one ones you get are large and they're lateent,

(46:23):
so you don't know about them for a long time.
So it's very risky coverage to write. And you know
that's why you don't typically see a an insurance company
startup saying hey, let's just write some excess insurance. You
really it really needs to be with a bigger carrier
that can diversify, you know, benefit from the diversification of

(46:45):
the risks. The other thing that I wanted to mention
with the how all the risks are are exaggerated with
access is there's something called process risk, and process risks
is the type of risk that you can diversify away
from just writing a bunch of policies.

Speaker 2 (47:06):
Uh, And that's kind.

Speaker 3 (47:07):
Of how it you know, that's the essentially the model
of insurance and how can provide value well with excess
It's hard to get a portfolio big enough and enough
exposure and claims to to really diversify away the process risk.
So that's another one that's that's just kind of stands out.

Speaker 4 (47:29):
Mm hmm. That's a that's a really good illustration.

Speaker 1 (47:32):
And as you talk about some of those unique risks,
you know, obviously reserving is very key in that. So
you know, does someone consider in light of this risk
and this volative inherent volatility, but there's some key considerations.
Factuaries who are doing reserving for for access casualty.

Speaker 2 (47:52):
Yeah, I'm sorry, I asked, Can you ask that again?

Speaker 1 (47:54):
Oh yeah, sure, yeah, yeah, Just so in light of
the inherent volatility and the riskiness that we just gossed
through this cycle her, you know, what are some key
considerations for actuaries who are reserving for the for excess casualty?

Speaker 2 (48:07):
Yeah.

Speaker 3 (48:10):
Well, kind of going back to what we said before,
or what I said before was not being overconfident in
the modeling, you know, really stepping back and asking yourself, Okay,
what are we doing here? When we're reserving, we are
being tasked with projecting what's going to happen in the future.

(48:33):
It's not really possible to know what's going to happen
in the future. You have to wait for it to
get there to know. And you know, actuaries and clever
people have have figured out that, well, you can look
at the past and use that to determine what's going
to happen in the future.

Speaker 2 (48:49):
But when it comes to something like excess insurance, there isn't.

Speaker 3 (48:52):
Much of the past, and it changes more than a
normal primary line of insurance, so there's there's not much
to go on. It's uh and it's in a state
of flux. So just kind of having the humility to
know that these regular reserving models and loss development and

(49:13):
so forth, you don't want to be overconfident in the results.
So as a that would apply to the kind of
pricing or reserving actuaries. And you know, actuaries can kind
of get in this weird circular logic cycle between pricing

(49:33):
and reserving where the reserving actuary is using pricing assumptions
to come up with with ultimates and then you know, okay,
we have we have an ultimate loss ratio now, and
somehow that finds its way into the pricing. So it's
it's like whereas that you know, chicken and the egg problem.

(49:54):
So that's something for actuaries to look out for. Yeah,
and the fact that, as I mentioned, it's harder to
diversify away the process risk. So that's something and all
these exaggerated risks is something that has to be that
actualis have to look out for when they're they're trying

(50:14):
to determine a risk load, because at the end of
the day, insurance companies are taking you know, very large
risks for relatively low premium.

Speaker 2 (50:24):
On some of these exposures.

Speaker 3 (50:26):
And yes, the probability of having a claim an access
claim is very low, but when you have one, they
can be really big and you can, like I said before,
you can be writing exposures that you don't even you
don't even know exist, but they will be covered in

(50:46):
the future.

Speaker 2 (50:47):
So you know, actuaries really need to be aware of,
you know.

Speaker 3 (50:52):
Step back and the big look at the big picture
when it comes to access. And I guess the one
thing that I feel kind of strongly about is, you know,
as a reserving actuary, you do have a responsibility to
very accurately communicate the results in all the caveats.

Speaker 2 (51:11):
I know, sometimes it feels like, you.

Speaker 3 (51:13):
Know, you're like weaseling your way out if you have
all these caveats and limitations on your estimates. But on
the flip side, you don't want to present them in
such a way that a company is going to make
a decision that is going to get it in trouble later,
you know, specifically underestimating reserves just because you don't have

(51:34):
enough information and then the company is making critical business decisions,
they increase their exposure and you know they're not going
to be happy with you eventually if you did not
adequately characterize the risks involved.

Speaker 4 (51:51):
Recently, you touched on riskload.

Speaker 1 (51:52):
I know we talked about riskload a few times in
this episode, and I know that they're going to people
who may not be familiar with the expression. I think
when I think of it in the property sense from
the based on my recollection, I remember it talks a
lot about aggregation, like you think I cut risk like
aggregation of you know, concentration risk, so in some ways
compensating for that when we think of and correct me

(52:13):
if I'm wrong on that.

Speaker 4 (52:14):
That's that's my recollection.

Speaker 1 (52:16):
But when you when you talk about liability risk loads,
is that more kind of compensating for things like mass
towards and again similar kind of concentration risk or is
it you know, another way of saying it is that
when you think a risk loads for liability, like what's
what are those incorporating?

Speaker 3 (52:32):
Yeah, well, I think of them as just reflecting the
fact that the insurance company is assuming risk that it
doesn't even know about and it needs to be compensated
for taking that risk. So, you know, just kind of

(52:53):
like the traditional investment advice is there's something you want
your expected return to be proportional to the risk or
you want the best return, but there's an expectation that
there's a proportional relationship between risk and return. Will Access
insurance is another one where it's exceptionally risky, so we

(53:16):
want to make sure we get an exceptionally good return.

Speaker 2 (53:20):
And how do you do that?

Speaker 4 (53:21):
Well?

Speaker 3 (53:22):
You that's reflected in the risk cload, my bigger risk fload.

Speaker 4 (53:27):
That's helpful.

Speaker 1 (53:28):
And this one more thing I want to touch on
regarding reserving is what are some of the most common
methods you're seeing? I know, first one that maybe comes
to my mind is born for you know, something when
you don't have early emergence, but you know, between some
of those traditional methods or is it more like individual
claim estimates? I know that's also something that companies do

(53:50):
in a more proprietary way. So like, what are some
of the most common reserving techniques you know within the
access space.

Speaker 3 (53:57):
Yeah, well, despite everything I said, the things like the
born Heuter Ferguson and the development methods are still pretty
commonly used and pretty prominent. But and there's some other
methods like that the single parameter parato. There's a couple
of good papers written on that. That's one I kind

(54:18):
of alluded to it before, where it's fitting a curve
to the severities. So you can do a frequency severity
method where the severity is determined by something like the
single parameter, a single parameter Parado model and the frequency.
That's usually a little bit easier to get at determining

(54:39):
your ultimate counts. So in general, frequency severity methods are
used a little bit more heavily, and then you know,
despice up a frequency severity method, you can do modeling
on the severity side using something like the single parameter preto.

Speaker 2 (55:03):
Yeah.

Speaker 3 (55:04):
Other than that, you know, kind of the traditional actuarial
methods are used. But in a way I feel like
that is to give everybody maximum flexibility in the selections,
so like the born here to Ferguson method, and it
would be very common if you're if you if you

(55:25):
are starting up a new program year one, year two,
your ultimate loss is probably going to be the based
on the Born ferg with the expected loss ratio based
on your whatever underlied your pricing assumptions. So that's that's
kind of like the self fulfilling prophecy part of it.

(55:45):
But once you have a little bit more data and
you're kind of stuck with let's face it, if you
don't have any information, uh, there's nothing to work with.
So there's no magic, there's no crystal ball you look
into and see the future you You just kind of
have to be have the proper humility about it and say, Okay,

(56:08):
here are the assumptions we're making. Actually, one thing that
I like to do and I wouldn't mind seeing this
done more often, is especially in lines where you just
don't have very much information, So as a reserving actuary,
to really focus on articulating and communicating the assumptions inherent

(56:33):
in your estimates. Because the assumption you have, the assumptions
you have, the data you have, the method between those
three things, that's where you're going to get your estimate
of ultimate You can present your assumptions in such a
way that, say, especially something like a startup program and

(56:54):
you're relying relying on the born Heuter Ferguson method, you
should be disclosing your assumption of how did you get
your expected loss ratio? Because that is really driving the result.
And when you share your assumptions and say hey, everybody,
does this seem reasonable to you? Because this is what
is driving our results, it kind of gives everybody an

(57:15):
opportunity to to at least see what.

Speaker 2 (57:18):
Your assumptions are and possibly way in.

Speaker 3 (57:21):
On them without getting into all the ACTU royal methodology.

Speaker 2 (57:26):
Mm hmm.

Speaker 1 (57:27):
Yeah, that's that's key and yeah, kind of thing of
a better note to end on. I think was very
insightful and I certainly learned a lot about the line
I have. I don't have a ton of practical experience
with it, and you know, certainly not as much as
you and you know, just looking forward to sharing this
with the community. And again, don just want to thank
you for your time and for sharing your expertise.

Speaker 3 (57:50):
Thank you very much, Dominic. It's been great being your guest.
And uh maybe we'll have a chance again to talk
in the future.

Speaker 4 (57:57):
Yeah, where are you again? You're in your is Philly?

Speaker 2 (57:59):
You said, yes, I'm outside of Philadelphia.

Speaker 1 (58:02):
Yes, we'll be sure to keep in touch YPAM on
that side and same when if you're in California.

Speaker 3 (58:08):
Yeah, awesome, All right, Dan, have a good one, All right,
thanks you too, take care righte.