Werner ch 1-3

Price = Cost + Profit

Basic Unit of risk underlying the premium

Amount insured pays for insurance policy

• 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 effect at certain point in time

Insured request to insurer for indemnication for financial loss from an event covered by the policy

Individual(s) making the demand for indemnication (claim) by alleging injuries or damages covered by the policy

a.k.a. accident date or occurrence date - date of event causing the loss

When claimant reports claim to insurer

Claims that have occurred, but not currently known by insurer

Amount payable to claimant under the terms of the insurance policy

Amounts that have been paid to claimants

Estimate of unpaid loss for known claims

Sum of paid loss and ending case reserve

Reported Losses = Paid Losses + Case Reserve

• Amount required to settle all claims for a defined group of policies
• Differs from reported loss due to IBNR and case adequacy (or IBNER)

Ultimate Losses = Reported Losses + IBNR Reserve+ IBNER Reserve

• 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

• Claim related expenses that cannot directly be attributable toa specific claim
• E.g., claims department salaries and rent

• 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

• Expenses other than commissions to acquire business
• E.g., advertising, mailings, salaries of employees who help write policies

• Remaining expenses associated with the operations
• E.g., rent, building maintenance, salaries of employees not included in other categories

• Taxes and fees for writing business
• Does not include federal income taxes

• 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

• Underwriting profit (or operating income): Generated from individual insurance policies
• Investment income: Generated by investing funds held by company

Premium = Losses + LAE + UW Expenses + UW Profit

• Ratemaking is prospective
• Should be achieved on overall and individual level

• 1. Rate changes
• 2. Changes in mix of business
• 3. Operational changes
• 4. Law changes
• 5. Inflationary pressures

• Used to:
• Identify trends in claims occurrence or utilization
• Measure effectiveness of u/w actions
• Frequency = Num of Claims / Num of Exposures

• Provides information about:
• Loss trends
• Impact of changes in claims handling procedures
• Severity = Total Losses / Num of Claims

• Highlight trends in overall loss costs due to changes in both frequency and severity
• Pure Premium = Total Losses / Num of Exposures = Frequency x Severity

• Highlight changes in mix of business
• Average Premium = Total Premium / Num of Exposures

Loss Ratio = Total Losses / Total Premium = Pure Premium / Average Premium

• 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

• Monitor and compare actual to expected
• May also compare to other insurers as a benchmark
• UW Exp Ratio = Total UW Expense / Total Premium

• Important when reviewing overall protability
• OER = UW Exp Ratio + (LAE / Earned Prem)

• Primary measure of profitability of a book of business
• Combined Ratio = Loss Ratio + (LAE / Earned Prem) + (UW Expenses / Written Prem)

• 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

• 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

Used to classify and calculate rate for a risk

• Help agents understand the rating process
• File with insurance regulators

• Rules
• Rate pages
• Rating algorithm
• Underwriting guidelines

• Contains qualitative information which helps user with rating algorithms
• Summary of available policy forms
• Premium determination considerations
• Classification of risk

• Contains the numbers needed to calculate premium
• E.g., base rates, rating factors, fees

• 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

• 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

• 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

• 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

• 1. Appropriateness for the intended purpose of the analysis
• 2. Reasonableness and comprehensiveness of the data elements

• Need to link policy exposure an premium with corresponding claims and losses
• Use Policy database and Claims database

• 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

• 1. Accurately match losses and premium for the policy
• 2. Use the most recent data available
• 3. Minimize data collection and retrieval costs

• Transactional data
• Primary use:
• Aggregation of exposures
• May be used for LOBs or coverages in which losses are reported and settled quickly

• No future development - the value remains fixed and doesn't change over time
• Readily available - most financial reporting on a calendar year basis

• 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

• 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

Better match of premium and losses than calendar year

• 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

• Group premiums and losses by year in which policy was written
• Losses arising from a PY can extend over a 24-month calendar period

True match between claims and exposures

Extended time frame - data takes longer to develop

• Group claims according to date of report to the insurer
• Claims-made coverage is dependent on the report date

Number of claims is fixed at close of the year

• 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

• 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

• Statistical Plans
• Other Aggregated Industry Data
• Competitor Rate Filings/Manuals
• Other Third-Party Data