Werner ch 5

  1. Adjustments to historical premium
    • Premium to current rate level
    • Projections distorted if historical premium doesn't reflect past rate changes
    • Develop premium to ultimate levels when premium is still changing
    • Project to expected future premium level
    • Includes premium trend and changes in mix of business
  2. Calendar Year Aggregation and Accident Year Aggregation of premium
    • All premium transactions within calendar period
    • Regardless of policy eff ective date
    • Represented graphically by squares
  3. Policy Year Aggregation of premium
    • All premium transactions on policies with eff ective dates during the year
    • Represented graphically by parallelograms
    • Need 24 calendar months to complete (assuming annual policies)
    • Reason that calendar year more often used
  4. Describe Written Premium
    • 1. Dollar amounts charged by an insurer for policies written during a speci fic time period
    • 2. Calendar Year Written Premium includes:
    • Premium for policies with eff ective dates during the calendar period
    • Mid-term adjustments during calendar year regardless of policy eff ective date
  5. Describe Policy Year Written Premium
    All premium and adjustments for policies with e ffective dates in policy period
  6. What is an Earned Premium?
    • Amount of the policy premiums that have been exposed to risk during a speci fied time period
    • Premium for coverage that has been provided
    • Represents portion of total premium that insurer can retain if policy is canceled
  7. Describe a Policy Year
    • Earned premium assign to year policy is eff ective
    • When policy expires, PY Written = PY Earned
    • Unlike CY, premium for one policy cannot be earned in two di erent policy years
    • Policy year premium is not fixed at end of PY for audited LOBs
    • Will continue to develop after end of PY period
  8. Describe an Unearned Premium
    • Portion of written premium for which coverage has not been provided
    • Amount of premium company has not yet earned
    • Insured is due back upon policy cancellation

    Written Premium = Earned Premium + Unearned Premium
  9. Describe an Inforce Premium
    • Full-term premium of all policies in eff ect at a speci fic point in time
    • Best estimate of the company's mix of business as of a given date
  10. Current Rate Level Adjustments to Premium
    • Adjustments made to historical premium to account for rate changes
    • Failure to adjust will incorrectly project future premium
  11. Extension of Exposures Adjustments to Premium
    • Method to bring rates to current level by re-rating each policy using current rates
    • Advantage: Most accurate method to bring rates to current level
    • Disadvantage: Need detailed data
  12. Parallelogram Method (a.k.a. geometric method) Adjustment to Premium
    • Adjusts the aggregated historical premium by an average factor to get premium on-level
    • Assumes exposure is uniformly distributed over time
  13. Parallelogram Method factors that a ffect application of method
    • Policy term
    • Calendar year versus policy year
    • Whether rate change a ffects policies midterm or only on effective date of policies
  14. What are the Standard Calculations for the Parallelogram Method?
    • Group policies into rate level groups according to timing of each rate change
    • Calculate the portion of earned premium corresponding to each rate level group
    • Calculate the cumulative relative rate level for each group
    • Calculate the average relative rate level for each year
    • Calculate the on-level factor = current relative rate level / average relative rate level
    • Apply on-level factor to earned premium for appropriate year
  15. What are some of the problems with the Parallelogram Method
    • Problem 1 - Assumes policies written uniformly throughout the year
    • Reasonable for some lines but inappropriate for others

    • Problem 2 - Generally applied at aggregate level using overall average changes
    • Adjusted premium will likely not be acceptable for classi fication analysis
  16. What is Premium Development needed for?
    • At time of analysis, ultimate premium for experience period may be unknown
    • Incomplete year of data
    • Premium audits
  17. Premium Trend
    • Distributional changes causing average premium level to change
    • Rating Characteristic: Example - Homeowners Amount of Insurance
    • Premium Level Changes: Example - Insurer chooses to move policyholders to a higher deductible
    • Shifts in Mix of Business: Example - Company purchases another insurer's book of business
  18. What are the steps to adjust for premium trend?
    • Determine how to measure any changes that have occurred
    • Determine if distributional shifts were one-time events or continuous
    • Judgmentally include any expected future shifts
  19. Written vs. Earned Premium to select premium trend
    • Argument for Earned
    • Used in most other parts of ratemaking analysis
    • Argument for Written
    • Allows for capture of more recent data because premium not earned until well after it is written
    • Using earned would postpone recognition of e ffects of most recent changes
    • Trends in written will eventually emerge in earned
  20. Selection of trend
    • 1. Often use quarterly average written premium
    • More responsive than annual average written

    • 2. Adjust data for rate changes and other one-time eff ects
    • If not done, selected trend will account for change, which will then adjust for it twice

    3. Compare quarterly average written to prior year quarterly average

    4. May fi t exponential or linear trend to data
  21. Describe One-Step Trending
    • Applies a single annual trend factor across the entire experience period and into the future policy period
    • Each year's earned premium in the experience period is trended separately to same point in time
  22. One Step Trending Period
    • 1. Trend period from the average experience period written date to the average e ffective period written date
    • 2. Average written date is half the policy term earlier than the average earned date
    • 3. Average written date for future policy period is eff ective date of new rates plus half of the period in which the rates are projected to be eff ective
  23. Items that can a ffect the length of the trending period
    • Policy term
    • Historical premium is policy year rather than calendar year
    • Length of time rates are expected to be in eff ect
  24. Difficulties in applying one-step trending
    • Changes in average premium vary signi cantly year-by-year
    • Historical changes are signi ficantly diff erent than expected future changes
  25. What are the advantages of Two-Step Trending?
    • 1. Single annual premium trend is not appropriate for each year in experience period
    • 2. Trend in historical period is signifi cantly diff erent that what is expected in future
  26. What is Step 1 in Two-Step Trending?
    • Trend all experience period data to the latest trend data point
    • Trend premium to the midpoint of the latest trend data point in the series
    • May use latest available quarter average written
    • May use latest annual average written
  27. What is Step 2 in Two-Step Trending?
    Trend from the latest data trend point to the average eff ective period written date
Card Set
Werner ch 5
Exam 5 TIA Werner ch 5