- TIA EXAM 5 - WERNER CH 01

Price = Cost + Profit

Basic Unit of risk underlying the premium

Amount insured pays for insurance policy

• Written premium - from policies issued during time period
• Earned premium - from coverage provided during time period
• Unearned premium - portion of written for which coverage has not been provided
• In-force premium - full-term premium for policies that are in effect at certain point in time

Insured request to insurer for indemnication for financial loss from an event covered by the policy

Individual(s) making the demand for indemnication (claim) by alleging injuries or damages covered by the policy

a.k.a. accident date or occurrence date - date of event causing the loss

When claimant reports claim to insurer

Claims that have occurred, but not currently known by insurer

Amount payable to claimant under the terms of the insurance policy

Amounts that have been paid to claimants

Estimate of unpaid loss for known claims

Sum of paid loss and ending case reserve

Reported Losses = Paid Losses + Case Reserve

• Amount required to settle all claims for a defined group of policies
• Differs from reported loss due to IBNR and case adequacy (or IBNER)

Ultimate Losses = Reported Losses + IBNR Reserve+ IBNER Reserve

• Claim related expenses that can directly be attributable to a specific claim
• E.g., legal fees for outside counsel hired to work on a specific claim

• Claim related expenses that cannot directly be attributable toa specific claim
• E.g., claims department salaries and rent

• 1. Paid to insurance agents or brokers for generating business
• 2. Usually stated as percentage of written premium
• 3. May vary between new and renewal business
• 4. May be based on quality and/or volume of business written

• Expenses other than commissions to acquire business
• E.g., advertising, mailings, salaries of employees who help write policies

• Remaining expenses associated with the operations
• E.g., rent, building maintenance, salaries of employees not included in other categories

• Taxes and fees for writing business
• Does not include federal income taxes

• Company assumes risk that premium charged is not enough to pay losses and expenses
• Must maintain capital to support this risk
• Entitles company to reasonable expected return on capital

• Underwriting profit (or operating income): Generated from individual insurance policies
• Investment income: Generated by investing funds held by company

To have a balanced fundamental insurance equation

• In accordance with 2nd CAS Ratemaking Principle
• *A rate provides for all costs associated with the transfer of risk
• *Achieve equilibrium at the aggregate level

Premium = Losses + LAE + UW Expenses + UW Profit

• Ratemaking is prospective
• Should be achieved on overall and individual level

Must adjust experience to expected future level when rates to be in effect

1st CAS Ratemaking Principle: A rate is an estimate of the expected value of future costs

• 1. Rate changes
• 2. Changes in mix of business
• 3. Operational changes
• 4. Law changes
• 5. Inflationary pressures

• Used to:
• 1.Identify trends in claims occurrence or utilization
• 2.Measure effectiveness of u/w actions

Frequency = Num of Claims / Num of Exposures

• Provides information about:
• 1.Loss trends
• 2.Impact of changes in claims handling procedures
• Severity = Total Losses / Num of Claims

• Can vary:
• Paid Severity = Paid Loss/Closed Claims
• Reported Severity = Rpt Loss/Rpt Claims

• 1. Highlight trends in overall loss costs due to changes in both frequency and severity
• Pure Premium = Total Losses / Num of Exposures = Frequency x Severity

• 1. Highlight changes in mix of business
• Average Premium = Total Premium / Num of Exposures

• 1. Used to measure rate adequacy
• Loss Ratio = Total Losses / Total Premium = Pure Premium / Average Premium

• Used to:
• 1. Monitor stability of costs associated with claim settlement procedures
• 2. Compare to other insurers to evaluate claims settlement procedures

LAE Ratio = Total LAE / Total Losses

• 1. Monitor and compare actual to expected
• 2. May also compare to other insurers as a benchmark
• UW Exp Ratio = Total UW Expense / Total Premium

• 1. Important when reviewing overall protability
• 2. Operational expenditures: measure portion of each prem $ used to pay for UW expenses and Loss Adjustment

OER = UW Exp Ratio + (LAE / Earned Prem)

• 1.Primary measure of profitability of a book of business
• Combined Ratio = Loss Ratio + (LAE / Earned Prem) + (UW Expenses / Written Prem)

• 1. Measures percentage of current insureds that renew their policies at expiration
• 2. Useful for product management and marketing
• -Used to determine the competitiveness of rates
• -Closely monitored following rate changes and major changes in service
• -Key parameter in projecting future premium volume
• Retention Ratio = Number of Policies Renewed / Num of Potential Renewal Pols

• 1. Measures rate at which prospective insureds accept a quote for new business
• 2. Useful for product management and marketing

Close Ratio = Number of Accepted Quotes / Number of Quotes