Werner Ch 15

  1. 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
  2. Manual rate modi cation mechanisms
    • Experience rating
    • Schedule rating
  3. Rating techniques for large commercial insureds
    • Large deductible plans
    • Loss-rated composite rating
    • Retrospective rating plans
  4. 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
  5. Formula for computing GL ERP credit/debit
    CD = (AER - EER) / EER x Z
  6. 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)
  7. 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
  8. 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
  9. 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
  10. 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
  11. Formula to calculate premium of Large Deductible Policy
    • CR = Credit Risk
    • RM = Risk Margin
    • P = (L + El + Ef + CR + RM) / (1 - V - Q)
  12. Basic Retrospective Rating Formula
    Retro Rating = (Basic Prem + Coverted Losses) x Tax Multiplier
  13. 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
  14. 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
  15. 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
Card Set
Werner Ch 15
Exam 5 TIA Werner Ch 15