VISUALIZE | INSIGHTS THAT POWER INNOVATION

How original loss curves can improve pricing in the London Market

International

In the absence of historical claims experience, or when data is sparse, irrelevant, or not credible, underwriters and actuaries may turn to traditional exposure-based pricing methods such as exposure curves, increased limit factors (ILFs), and excess of loss scales.

Lloyd’s Iso Portal

Original loss curves, such as exposure curves, increased limit factors (ILFs), and excess of loss scales, are extremely useful for both property and casualty businesses as they provide consistent internal pricing, as all risk in a portfolio will be priced using the same basis.

Risk pricing is challenging when you do not have historical data, as claims are random events with uncertain frequency and severity. In the London Market, this problem is exacerbated by shared or layered insurance programmes and other complex reinsurance structures when having to determine individual layer loss costs for risks with large limits.

Original loss curves, such as exposure curves, increased limit factors (ILFs), and excess of loss scales, are extremely useful for both property and casualty businesses as they provide consistent internal pricing, as all risk in a portfolio will be priced using the same basis.

They’re an effective benchmark that can tell you the link between losses on one layer to losses on another layer. If we can estimate the losses for one layer, we can often use the curve to estimate the losses for another layer.

The origins and applications of original loss curves are discussed in detail in a recent Verisk white paper, Demystifying the origins and applications of original loss curves.

Being able to perform ground-up and excess loss cost analyses, price on a consistent basis, and evaluate market opportunities are critical capabilities that can empower your actuarial and underwriting decisions. 

The ideal curve

There are many market curves that have been created over the years, such as the Ludwig and Salzmann curves, the Swiss Re/Gasser curves, Lloyd’s curves, and Verisk curves. It can be difficult to know which one to use, and they may not always be available. Some are based on buildings cover only (not contents or business interruption), perils may be limited to fire only, and the granularity of data may not be sufficient, e.g., it doesn’t vary by occupancy or size of risk. An additional issue is that most curves are based on U.S. data, which may not be suitable for other jurisdictions.

The ideal curves are robust and reliable, based on credible claims data, but many of the most commonly used curves are formula-driven, for example, parametric curves.

How can I use these curves?

Verisk offers the most up-to-date, granular, and comprehensive coverage of the widely available market curves. They’re simple to implement, often provided in a tabular format, and are easy to explain. They’re available for the U.S., and recalibrated versions are available for the UK, Germany, France, the Netherlands, and Australia.

In the absence of a sufficient volume of non-U.S. data to derive the curves from scratch, the U.S. curves have been recalibrated using the COPE factors (construction, occupancy, protection and exposure) and ARM factors (amount of insurance, rebuild costs and miscellaneous factors such as social inflation, etc.), and have been validated using international data.

All Lloyd’s syndicates have access to the Lloyd’s ISO Portal, which acts as an interface for Verisk’s data. Within the portal, there are 18 lines of business containing loss costs information, trends, ILFs, as well as forms, wordings, circulars, and estimates of catastrophic insured property losses.

Learn more about the Lloyd's ISO Portal.

For more information about ISO Curves, current data sharing initiatives or any other issues discussed, please contact Shani Clarke at Shani.Clarke@verisk.com.


Shani Clarke

Shani Clarke is an associate actuarial consultant at Verisk. She can be contacted at Shani.Clarke@verisk.com.


Visualize Subscribe

Get the best of Visualize!

We'll send Visualize Monthly, and our most popular content, right to your inbox.

Subscribe now