- TIA EXAM 5 2011 - FELDBLUM

• 1. Important when cash flows and premiums vary by year
• 2. Life and health insurance price determination
• 3. Examine profit of complete insurance contract from start to finish

1. Cancellation: P/C carrier has right to terminate the policy at renewal

2. Claim costs: vary by duration in life/health (more so than P/C)

3. Expenses: show similar pattern, one difference is 1st year commission for life is high, but low for renewals; for P/C independent agents commissions do not differ between years

4. Level premiums common in life insurance; P/C rates maybe revised each yearF

1. Commissions: personal lines direct writers have higher 1st year commission rates

2. Cancellations: Stable book of business with rare contract canclellation

3. Loss costs: expected loss costs are greater for new business than renewal

1. Data needed are not always available

2. Casualty pricing techniques do not always take into account long-term profit considerations

3. The casualty insurance policy allows great fexibility in premiums and benefit levels

4. Liability claim costs are uncertain, both in magnitude & timing

1. Level premiums for whole life policies

2. Stability of life insurance benefits versus variability of casulaty insurance losses

The relationship of losses and expenses to persistency

1. Experience: Good driving habits form over time

2. Youth: young drivers usually have relatively new policies and higher than average claim frequencies

3. Transience: Many high risk drivers have high termination rates

4. Acquisition of vehicle: Insured isn't familar with the car

5. D'Arcy four

1. Young males likely to cancel (move,marry,drop coverage)

2. U/W more likely to cancel a young male driver than an adult

3. Young males more likely to default on premium/can't afford it

4.Usually have higher premiums and more incentive to shop around

1. Inability to surcharge new insureds properly since less information is available

2. Higher loss potential of insurance shoppers who switch around looking for bargain coverage

3. New insureds include a high % of risks not wanted by other insurers

4. New insureds may be unfamiliar with local driving conditions

1.U/W expenses incurred predominantly in the 1st year include salaries, cost of policy insurance, and u/w reports

2.Loss control expenses incurred at or before policy issuance include technical inspections, landfill inspections, loss engineering services, financial analysis, and building inspections

3.Acquisition expenses for direct writers are greater in the 1st year because of higher new business commission rates

4. Most "other acquisition expenses" such as advertising, subsidies for new agents & development costs

1. Many policyholders are undecided about the relative valueof the policy and required premiums; some may decide that insurance is not worthwhile

2. insured may be dissatisfied with their carriers service

3.Some may believe the premium is too high and continue shopping

4. Some may be unable to afford insurance

5. Carriers often reevaluate newly acquired risks with claims and cancel policy

**But once a policyholder has kept the policy for several years, it is likely they will renew

Number of terminations during a given renewal period divided by the sum of (terminations during that period plus policies persisting through that period)

Number of terminations during a given renewal period divided by the number of originally issued policies in that cohort

• 1. Settlement Lag
• 2. Uncertainty of reserves (affected by inflation, court decisions, jury awards, social expectations)
• 3. Records have incurred losses on an undiscounted basis
• 4. P&C accounting doesn't match the U/W experience on a block of policies with the investment experience for the same block of policies

• 1. Record undiscounted incurred claims, but include an offsetting investment income account tied to the assets supporting the unpaid losses
• 2. Record cash transactions
• 3. Record discounted loss reserves

• 1. Return on Equity: model discounts future earnings at company's cost of capital & assumes surplus equals GAAP equity
• 2. Break-even Equity: use a discount rate equal to the yield on securities of similar risk. Discount losses to same date as premium is collected & see if PY of total Profits is > 0.
• 3. Internal Rate of Return: Show several columns of cash transactions (paid loss, investment income) and determine IRR

• 1.Relative average loss costs of these two groups of insureds (***)
• 2. Relative average persistency rates of these two groups of insureds (***)
• 3. Dimensions of the classication system
• 4. Strength of loss ratio improvement by policy year for these insureds

• 1.Policy Basis model compares losses and expenses for all coverages combined among classes of insureds, and the resultant rate relativities must then be allocated to coverages
• 2. Coverage Basis model compares losses and expenses for an individual coverage among classes of insureds

Persistency rates by original classification instead of by current classification

• 1. Average Loss Cost
• 2. Average Fixed Expense
• 3. Persistency Rates

• 1. Any strategy may affect new business production or retention rates
• 2. Premium rates and relativities affect consumer demand & the mix of insureds, thereby affecting insurer profitability

• 1. Expected loss cost by policyholder age
• 2. Persistency rates by policyholder age and policy duration
• 3. Price elasticity of demand (effect of price on retention)

Underpricing insured in their 50s to gain market share among this desirable group, then reaping the profits when they age