# - TIA EXAM 5 - WERNER CH 15.txt

 Considerations when pricing Commercial Insurance Products 1. Creation of homogeneous groups for ratemaking purposes not feasible2. Some commercial risks are large enough to use their own experience (in whole or part) to price3. Individual Risk Rating (IRR):Price coverage provided more accurately than if rates were based in manual rates onlyBalance risk sharing and risk bearing Manual rate modification mechanisms Experience ratingSchedule rating Rating techniques for large commercial insureds Large deductible plansLoss-rated composite ratingRetrospective rating plans Actual and expected experience may be compared in following ways for experience period Actual paid loss & ALAE with expected paid loss & ALAEActual reported loss & ALAE with expected reported loss & ALAEProjected ultimate loss & ALAE with expected ultimate loss & ALAEProjected ultimate loss & ALAE adjusted to current exposure and dollar levels with expected ultimate loss & ALAE based upon the current exposure and dollar levels If basis of experience rating formula is projected ult losses at current exposure & dollar levels, what do we have to adjust for? 1. Economic & social inflation2. Changes in risk characteristics3. Changes in policy limits The expected component losses estimate what and Estimated as a product of exp loss rate and exposure measureCan reflect prior/current period Formula for computing GL ERP credit/debit CD = (AER - EER) / EER x Z Calculation of the Actual Experience Ratio (AER) 1. Company Subject B/L L&ALAE Costs= Curr B/L Prem * Exp LR * Detrend*2. Calculate Reported Losses and ALAE Limited by Basic Limits and MSL*3. Add Expected Unreported Losses and ALAE Limited by Basic Limits and MSL= Comp Subj B/L Loss&ALEAE (1) * EER * %Unrpt*4. AER = (2 + 3) / (1) NCCI Formula with substitutions for primary and excess credibility Mp = (Ap + w x Ae + (1 - w) x Ee + B) / (E + B)Ap = Actual Primary LossesAe = Actual Excess LossesEp = Expected Primary LossesEe = Expected Excess LossesB = Ballast Value [stabilizing value based on Zp = E / (E+B)]w = Excess Losses Weighting Factor = Ze / Zp What is the D-ratio? Loss elimination ratio at primary loss limit Schedule Rating 1. Does not directly reflect claim experience2. Recognizes characteristics expected to have material effect on experience that are not actually reflected in experienceChanges in exposureChanges in risk control programsUsed when risk too small to qualify for experience or composite rating3. May be based on objective criteria or subjective underwriting judgment4. Avoids double-counting the effect of risk characteristic in both experience and schedule mod**e.g. newly implemented safety program improves experience over yrs Composite Rating 1. Large, complex risks use a single, composite, exposure base instead of several for many di fferent coverages2. Composite rate determined at the beginning of the policy period using historical exposuresMay be determined using manual rates with experience and/or schedule modsDepending on size, may be based solely on insured's own experience (a.k.a. Loss Rated)3. After expiration, audited to determine composite exposures Pricing considerations of large deductible policies Claims Handling: Insurer may handle all claims, even if below deductibleApplication of Deductible: May apply only to losses or losses & ALAEDeductible Processing: Insurer may pay cost of entire claim and then seek reimbursement from company for amounts below deductibleRisk Margin: Loss above large ded are more uncertain, & profit may need adjustment Formula to calculate premium of Large Deductible Policy CR = Credit RiskRM = Risk MarginP = (L + ALAE + Ef + CR + RM) / (1 - V - Q) Basic Retrospective Rating Formula Retro Rating = (Basic Prem + Coverted Losses) x Tax Multiplier Basic Premium = (Expense Allowance - Expense Prov by LCF + Net Ins Charge) x Std PremIntended to provide for:Insurer's target u/w profit and expenses excluding expenses provided for by LCF and tax multiplierNet charge for limiting the retro premium between minimum and maximumCost of limiting each occurrence, if applicable Converted losses = Rpt Loss * LCF Standard Premium Insurance premium for risk before consideration of retro plan and any premium discountDetermined on basis of exposure, insurer's rates, experience mod, and any premium charges excluding premium discountSP = Manual Prem * (1 +/- Experience Modification) Insurance Charge and Insurance Savings Insurance Charge is an estimate of cost to insurer associated with retro maxInsurance savings is an estimate of savings to insurer for requiring a min premium Company Subject Loss & ALAE Cost = SP * Experience L & ALAE ratio Authorjenielwu ID135420 Card Set- TIA EXAM 5 - WERNER CH 15.txt Descriptionexam 5a Updated2012-02-15T04:22:40Z Show Answers