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Considerations when pricing Commercial Insurance Products
- 1. Creation of homogeneous groups for ratemaking purposes not feasible
- 2. Some commercial risks are large enough to use their own experience (in whole or part) to price
- 3. Individual Risk Rating (IRR):
- Price coverage provided more accurately than if rates were based in manual rates only
- Balance risk sharing and risk bearing
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Manual rate modi cation mechanisms
- Experience rating
- Schedule rating
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Rating techniques for large commercial insureds
- Large deductible plans
- Loss-rated composite rating
- Retrospective rating plans
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Actual and expected experience may be compared in following ways for experience period
- Actual paid loss & ALAE with expected paid loss & ALAE
- Actual reported loss & ALAE with expected reported loss & ALAE
- Projected ultimate loss & ALAE with expected ultimate loss & ALAE
- Projected ultimate loss & ALAE adjusted to current exposure and dollar levels with expected ultimate loss & ALAE based upon the current exposure and dollar levels
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Formula for computing GL ERP credit/debit
CD = (AER - EER) / EER x Z
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Calculation of the Actual Experience Ratio (AER)
- 1. Company Subject B/L L&ALAE Costs
- 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
- 4. AER = (2 + 3) / (1)
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NCCI Formula with substitutions for primary and excess credibility
- Mp = (Ap + w x Ae + (1 - w) x Ee + B) / (E + B)
- Ap = Actual Primary Losses
- Ae = Actual Excess Losses
- Ep = Expected Primary Losses
- Ee = Expected Excess Losses
- B = Ballast Value [stabilizing value based on Zp = E / (E+B)]
- w = Excess Losses Weighting Factor = Ze / Zp
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Schedule Rating
- 1. Does not directly reflect claim experience
- 2. Recognizes characteristics expected to have material eff ect on experience that are not actually reflected in experience
- Changes in exposure
- Changes in risk control programs
- Used when risk too small to qualify for experience or composite rating
- 3. May be based on objective criteria or subjective underwriting judgment
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Composite Rating
- 1. Large, complex risks use a single, composite, exposure base instead of several for many di fferent coverages
- 2. Composite rate determined at the beginning of the policy period using historical exposures
- May be determined using manual rates with experience and/or schedule mods
- Depending on size, may be based solely on insured's own experience (a.k.a. Loss Rated)
- 3. After expiration, audited to determine composite exposures
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Pricing considerations of large deductible policies
- Claims Handling: Insurer may handle all claims, even if below deductible
- Application of Deductible: May apply only to losses or losses & ALAE
- Deductible Processing: Insurer may pay cost of entire claim and then seek reimbursement from company for amounts below deductible
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Formula to calculate premium of Large Deductible Policy
- CR = Credit Risk
- RM = Risk Margin
- P = (L + El + Ef + CR + RM) / (1 - V - Q)
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Basic Retrospective Rating Formula
Retro Rating = (Basic Prem + Coverted Losses) x Tax Multiplier
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Basic Premium
- = (Expense Allowance - Expense Prov by LCF + Net Ins Charge) x Std Prem
- Intended to provide for:
- Insurer's target u/w pro t and expenses excluding expenses provided for by LCF and tax multiplier
- Net charge for limiting the retro premium between minimum and maximum
- Cost of limiting each occurrence, if applicable
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Standard Premium
- Insurance premium for risk before consideration of retro plan and any premium discount
- Determined on basis of exposure, insurer's rates, experience mod, and any premium charges excluding premium discount
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Insurance Charge and Insurance Savings
- Insurance Charge is an estimate of cost to insurer associated with retro max
- Insurance savings is an estimate of savings to insurer for requiring a min premium
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