Werner ch 1-3

  1. Product Pricing Fundamental Equation
    Price = Cost + Pro fit
  2. Defi ne "Exposure (X)"
    Basic Unit of risk underlying the premium
  3. De fine "Premium (P)"
    Amount insured pays for insurance policy
  4. What are the Premium Measurement methods
    • Written premium - from policies issued during time period
    • Earned premium - from coverage provided during time period
    • Unearned premium - portion of written for which coverage has not been provided
    • In-force premium - full-term premium for policies that are in eff ect at certain point in time
  5. Define "Claim"
    Insured request to insurer for indemni cation for fi nancial loss from an event covered by the policy
  6. Defi ne "Claimant"
    Individual(s) making the demand for indemni cation (claim) by alleging injuries or damages covered by the policy
  7. Defi ne "Date of Loss"
    a.k.a. accident date or occurrence date - date of event causing the loss
  8. Defi ne "Report Date"
    When claimant reports claim to insurer
  9. Defi ne "IBNR (Incurred but not reported)"
    Claims that have occurred, but not currently known by insurer
  10. Defi ne "Loss"
    Amount payable to claimant under the terms of the insurance policy
  11. De fine "Paid Losses"
    Amounts that have been paid to claimants
  12. De fine "Case Reserve"
    Estimate of unpaid loss for known claims
  13. Defi ne "Reported Loss (a.k.a. Case Incurred Loss)"
    Sum of paid loss and ending case reserve

    Reported Losses = Paid Losses + Case Reserve
  14. Defi ne "Ultimate Loss"
    • Amount required to settle all claims for a de fined group of policies
    • Diff ers from reported loss due to IBNR and case adequacy (or IBNER)

    Ultimate Losses = Reported Losses + IBNR Reserve+ IBNER Reserve
  15. De fine "Allocated Loss Adjustment Expenses (ALAE)"
    • Claim related expenses that can directly be attributable to a specifi c claim
    • E.g., legal fees for outside counsel hired to work on a specifi c claim
  16. Defi ne "Unallocated Loss Adjustment Expenses (ULAE)"
    • Claim related expenses that cannot directly be attributable toa speci fic claim
    • E.g., claims department salaries and rent
  17. What are some characteristics of Commissions and Brokerage?
    • 1. Paid to insurance agents or brokers for generating business
    • 2. Usually stated as percentage of written premium
    • 3. May vary between new and renewal business
    • 4. May be based on quality and/or volume of business written
  18. In relation to underwriting expenses, what are "Other Acquisitions"?
    • Expenses other than commissions to acquire business
    • E.g., advertising, mailings, salaries of employees who help write policies
  19. What is a "General" expense in relation to underwriting expenses?
    • Remaining expenses associated with the operations
    • E.g., rent, building maintenance, salaries of employees not included in other categories
  20. What are "Taxes, Licenses, and Fees" in relation to underwriting expenses?
    • Taxes and fees for writing business
    • Does not include federal income taxes
  21. De fine Underwriting Profi t
    • Company assumes risk that premium charged is not enough to pay losses and expenses
    • Must maintain capital to support this risk
    • Entitles company to reasonable expected return on capital
  22. What are the two main sources of pro fit?
    • Underwriting profi t (or operating income): Generated from individual insurance policies
    • Investment income: Generated by investing funds held by company
  23. What is the Fundamental Insurance Equation?
    Premium = Losses + LAE + UW Expenses + UW Pro fit
  24. Appropriate balance of the Fundamental Insurance Equation must consider facts that:
    • Ratemaking is prospective
    • Should be achieved on overall and individual level
  25. What are some examples of items for which experience may need adjustment?
    • 1. Rate changes
    • 2. Changes in mix of business
    • 3. Operational changes
    • 4. Law changes
    • 5. Inflationary pressures
  26. Frequency
    • Used to:
    • Identify trends in claims occurrence or utilization
    • Measure eff ectiveness of u/w actions
    • Frequency = Num of Claims / Num of Exposures
  27. Severity
    • Provides information about:
    • Loss trends
    • Impact of changes in claims handling procedures
    • Severity = Total Losses / Num of Claims
  28. Pure premium or loss cost (L)
    • Highlight trends in overall loss costs due to changes in both frequency and severity
    • Pure Premium = Total Losses / Num of Exposures = Frequency x Severity
  29. Average Premium
    • Highlight changes in mix of business
    • Average Premium = Total Premium / Num of Exposures
  30. Loss Ratio
    Loss Ratio = Total Losses / Total Premium = Pure Premium / Average Premium
  31. Loss adjustment expense ratio
    • Used to:
    • Monitor stability of costs associated with claim settlement procedures
    • Compare to other insurers to evaluate claims settlement procedures
    • LAE Ratio = Total LAE / Total Losses
  32. Underwriting Expense Ratio
    • Monitor and compare actual to expected
    • May also compare to other insurers as a benchmark
    • UW Exp Ratio = Total UW Expense / Total Premium
  33. Operating Expense Ratio
    • Important when reviewing overall pro tability
    • OER = UW Exp Ratio + (LAE / Earned Prem)
  34. Combined Ratio
    • Primary measure of profi tability of a book of business
    • Combined Ratio = Loss Ratio + (LAE / Earned Prem) + (UW Expenses / Written Prem)
  35. Retention Ratio
    • 1. Measures percentage of current insureds that renew their policies at expiration
    • 2. Useful for product management and marketing
    • Used to determine the competitiveness of rates
    • Closely monitored following rate changes and major changes in service
    • Key parameter in projecting future premium volume
    • Retention Ratio = Number of Policies Renewed / Num of Potential Renewal Pols
  36. Close Ratio (a.k.a. hit ratio or conversion rate)
    • 1. Measures rate at which prospective insureds accept a quote for new business
    • 2. Useful for product management and marketing
    • Close Ratio = Number of Accepted Quotes / Number of Quotes
  37. What is a rating manual used for?
    Used to classify and calculate rate for a risk
  38. Written manuals are used to do what?
    • Help agents understand the rating process
    • File with insurance regulators
  39. What information is needed to calculate premium for a given risk?
    • Rules
    • Rate pages
    • Rating algorithm
    • Underwriting guidelines
  40. What do rating manual rules contain?
    • Contains qualitative information which helps user with rating algorithms
    • Summary of available policy forms
    • Premium determination considerations
    • Classi fication of risk
  41. What do Rate Pages contain?
    • Contains the numbers needed to calculate premium
    • E.g., base rates, rating factors, fees
  42. What are Rating Algorithms and what type of items do they include?
    • Provides the detail instructions to calculate the policy premium
    • 1. Uses information in rules and rate pages
    • 2. Includes such items as: Order to consider rating variables, How rating variables are applied (e.g., multiplicative, additive), Maximum and minimum premiums (or sometimes maximum discount or surcharge, Rounding instructions
  43. What are the Underwriting Guidelines?
    • Company-specifi c criteria for acceptance or placement of a risk
    • Decisions to accept, decline, or refer risks
    • Company placement
    • Tier placement
    • Schedule rating credits/debits
  44. What is a Ratemaking Review?
    • 1. Analyze adequacy of existing rates
    • Generally use internal or industry historical data to project future costs
    • Company should collect and maintain relevant and consistent historical data
    • 2. Pricing new products
  45. What should you do when ratemaking data is limited?
    • Must be aware of the impact on the analysis
    • Should examine how sensitive the results are to various assumptions
    • Select data that minimizes distortions in results
  46. What should you review internal data for?
    • 1. Appropriateness for the intended purpose of the analysis
    • 2. Reasonableness and comprehensiveness of the data elements
  47. Risk Data used for Ratemaking
    • Need to link policy exposure an premium with corresponding claims and losses
    • Use Policy database and Claims database
  48. Accounting information needed for Ratemaking
    • 1. May not even be speci fic to one line of business
    • 2. Expenses that fall into this category
    • Underwriting expenses - incurred in acquisition and servicing of policies
    • ULAE
  49. What three objectives apply to Data Aggregation?
    • 1. Accurately match losses and premium for the policy
    • 2. Use the most recent data available
    • 3. Minimize data collection and retrieval costs
  50. Aggregation by Calendar Year
    • Transactional data
    • Primary use:
    • Aggregation of exposures
    • May be used for LOBs or coverages in which losses are reported and settled quickly
  51. Advantages of Calendar Year Data
    • No future development - the value remains fi xed and doesn't change over time
    • Readily available - most financial reporting on a calendar year basis
  52. Main Disadvantage of Calendar Year Data
    • Mismatch in timing between premium and losses
    • Earned premium comes from policies in force during the year
    • Losses may come from payments or reserve changes on policies from previous years
  53. Aggregation by Accident Year
    • Losses grouped according to date of occurrence, regardless of when pol written or claim reported
    • Will develop over successive CYs with more information and as new claims are reported
    • Most common grouping of claims data for the actuarial analysis of unpaid claims
  54. Advantage of Accident Year Aggregation
    Better match of premium and losses than calendar year
  55. Disadvantage of Accident Year Aggregation
    • Must estimate future development on claims
    • May select valuation date several months after end of year to improve estimate because allows some time for loss emergence
  56. Aggregation by Policy Year or Underwriting Year
    • Group premiums and losses by year in which policy was written
    • Losses arising from a PY can extend over a 24-month calendar period
  57. Advantage of Policy Year Aggregation
    True match between claims and exposures
  58. Disadvantage of Policy Year Aggregation
    Extended time frame - data takes longer to develop
  59. Aggregation by Report Year
    • Group claims according to date of report to the insurer
    • Claims-made coverage is dependent on the report date
  60. Advantage of Report Year Aggregation
    Number of claims is fi xed at close of the year
  61. Overall versus Classi fication Analysis
    • Overall analysis
    • Reviewing the adequacy of the overall rate level
    • Data can be highly summarized

    • Classi cation analysis
    • Data must be at a more detailed level
  62. Sometimes the desired data for analysis is unavailable, how do you deal with this?
    • Must work with available data and use actuarial judgment to deal with data de ficiencies
    • E.g., if missing earned premium by territory, may use in force premium by territory to estimate
  63. External Data
    • Statistical Plans
    • Other Aggregated Industry Data
    • Competitor Rate Filings/Manuals
    • Other Third-Party Data
Card Set
Werner ch 1-3
Exam 5 TIA Werner ch 1-3