1. Insurance Basics Flashcards
Loss Adjustment expenses can be divided in which 2 components?
- Defense and cost containment (DCC)
- Adjusting and other (A&O) (Fees, claim adjuster salaries, overhead expenses)
Underwriting expenses is the sum of? (4 components)
- Commissions and brokerage
- Other acquisition Costs (ex. Marketing)
- Taxes, licenses, and fees
- General Expenses
Estimate ultimate losses is the sum of?
- Reported Losses
- IBNR Reserve
- IBNER Reserve
Fundamental Insurance Equation
Premium = Losses + LAE + UW Expenses + Profit
Factors that should be considered when using historical experience to estimate components of the fundamental insurance equation
- Rate changes
- Operational Changes
- Inflationary pressures
- Change in the mix of business written
- Law changes
Ratemaking based on fundamental insurance equation considers (2 elements)
- Ratemaking is prospective
- Balance in the fundamental insurance equation should be attained at the aggregate and individual levels
Frequency
Nb Claims/Nb Exposures
- Severity
- Paid Severity
- Reported Severity
- Losses/Nb Claims
- Losses on closed claims/Nb of closed claims
- Reported Losses/Nb of Reported claims
Pure premium/Loss Cost
Losses/Nb Exposures = freq x sev
Average Premium
Premium/Nb exposures
- Loss Ratio
- Loss & LAE
- Losses/ Premium = Pure Premium/Average Premium
- (Loss + LAE)/Premium
Loss Adjustment Expense Ratio
LAE (Incl. ALAE + ULAE)/Losses
Note :
LR (1 + LAE Ratio) = Loss & LAE Ratio
Underwriting Expense Ratio
UW Expenses/Premium
Operating Expense Ratio
UW expense ratio + LAE/Earned premium
Combined Ratio
Loss ratio + LAE/EP + UW expenses/WP
= LR (1 + LAE Ratio) + UW expenses/WP
*If expenses incurred during the policy term are divided by EP :
Combined Ratio = Loss Ratio + OER
Retention Ratio
Nb Policies Renewed/Nb Potential Renewal Policies
Close Ratio (Hit ratio, quote-to-close ratio, conversion rate)
Nb Accepted Quotes/Nb quotes
What are the 2 categories of UW Expenses? How are they treated differentlty in the UW Expense Ratio
- Incurred at policy’s inception (Commissions, other aquisition, taxes, licenses, fees) : Divided by written Premium
- Incurred during the policy term (General expenses) : Divided by earned Premium
What are some use cases of the UW expense Ratio?
- Monitor uw ratio over time
- Perform the following comparisons
- Actual change in the uw expense ratio to expected changes based on general inflation
-Their own UW expense ratio to the ratios of other companies as a benchmark for policy acquisition and service expenditure
3 criterias for exposures
- Proportional to expected loss
- Practical
- Considerate of historical precedence
2 rating methods for large commercial risks
- Composite Rating
- Loss-rated composite rating
Verifications of data (4)
- Consistency with financial statement data
- Consistency with prior data
- Reasonableness of data
- Clarity and accuracy of data definitions
Data considerations (4)
- Limited Data
- Multiple currencies
- Large claims
- Terminology differences
3 general goals of data aggregation
- Accurately match losses and premium for the policy
- Use the most recent data available
- Minimize the cost associated with gathering and retreving data
Calendar year aggregation :
Description, Advantages (3) and disadvantages (2)
Description : Groups data according to calendar year (Transaction data), regardless of when policy was issued or accident year
Advantages :
1. Data is readily available once the calendar year ends
2. There is no future development (Prem, Exp, losses are fixed at the end of the year)
3. Data is easily accessible at no additional cost, as most insurers conduct financial reporting on a calendar year basis
Disadvantages :
1. Mismatch in timing between premiums and losses (Premium earned can be from policies written in previous years, losses may include payments and reserve on claims from policies issued years ago)
2. Inability to capture major event development, due to fixed nature of data
Accident year aggregation : Advantages (3) and disadvantages (2)
Description :
Groups data according to accident date (Prem and exp : same as calendar year)
Advantages :
1. Easy to achieve and easy to understand
2. Better match of premiums and losses than calendar year (Losses paid for claims that occured during the year are compared to premiums earned during the same year)
3. Useful for identifying the impact of ME/ Change due to econ./ regulatory forces
Disadvantages :
1. Requires estimation of future development for known losses that are not closed at the end of the year
2. Provides a less accurate matching in premiums and losses compared to the policy/uw year aggregation method
Policy year aggregation (UW year aggregation) : Description, Advantages (2) and disadvantages (2)
Description :
Groups data according to which year policies were written
Advantages :
1. Best match between prem & losses
2. Useful for identifying the impact of uw or pricing changes
Disadvantages :
1. Longer development time (Exposures are not fully earned until after the end of the policy year)
2. Difficulty in understanding and isolating the impact of a significant event (Catastrophe, court ruling, …)
Report year aggregation : Description, Advantage (1) and disadvantage (1)
Description :
Groups data according to when claims were reported, typically used for claims-made policy, where coverage depends on report date of claims
Advantage:
- Provides more stable data than accident year aggregation (Nb of claims is fixed at the end of the year)
Disadvantage :
- Development on incurred but not reported claims is excluded
The aggregation of losses is based on which 3 factors?
- Choice of relevant statistics (Ex. paid or reported losses)
- Data aggregation method (calendar, accident, policy, report)
- Period of time, determined by :
- Accounting Period ( Specific timeframe in which losses are recorded, often consistent with financial statement )
- Valuation Date ( Date at which losses are assessed for analysis, can be different from accounting period, can be expressed at nb months after start/end of the accounting period)
Written Exposure (Relation ship for both individual & group policies, for CY&AY)
Written exposure = EE + EoY UE - BoY UE
Written exposure (Relationship for policy year)
WE = EE + UE (BoY = 0)
