1. Insurance Basics

Question 1

Loss Adjustment expenses can be divided in which 2 components?

Answer 1

1. Defense and cost containment (DCC)
2. Adjusting and other (A&O) (Fees, claim adjuster salaries, overhead expenses)

Question 2

Underwriting expenses is the sum of? (4 components)

Answer 2

1. Commissions and brokerage
2. Other acquisition Costs (ex. Marketing)
3. Taxes, licenses, and fees
4. General Expenses

Question 3

Estimate ultimate losses is the sum of?

Answer 3

1. Reported Losses
2. IBNR Reserve
3. IBNER Reserve

Question 4

Fundamental Insurance Equation

Answer 4

Premium = Losses + LAE + UW Expenses + Profit

Question 5

Factors that should be considered when using historical experience to estimate components of the fundamental insurance equation

Answer 5

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

Question 6

Ratemaking based on fundamental insurance equation considers (2 elements)

Answer 6

1. Ratemaking is prospective
2. Balance in the fundamental insurance equation should be attained at the aggregate and individual levels

Question 7

Frequency

Answer 7

Nb Claims/Nb Exposures

Question 8

1. Severity
2. Paid Severity
3. Reported Severity

Answer 8

1. Losses/Nb Claims
2. Losses on closed claims/Nb of closed claims
3. Reported Losses/Nb of Reported claims

Question 9

Pure premium/Loss Cost

Answer 9

Losses/Nb Exposures = freq x sev

Question 10

Average Premium

Answer 10

Premium/Nb exposures

Question 11

1. Loss Ratio
2. Loss & LAE

Answer 11

1. Losses/ Premium = Pure Premium/Average Premium
2. (Loss + LAE)/Premium

Question 12

Loss Adjustment Expense Ratio

Answer 12

LAE (Incl. ALAE + ULAE)/Losses

Note :
LR (1 + LAE Ratio) = Loss & LAE Ratio

Question 13

Underwriting Expense Ratio

Answer 13

UW Expenses/Premium

Question 14

Operating Expense Ratio

Answer 14

UW expense ratio + LAE/Earned premium

Question 15

Combined Ratio

Answer 15

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

Question 16

Retention Ratio

Answer 16

Nb Policies Renewed/Nb Potential Renewal Policies

Question 17

Close Ratio (Hit ratio, quote-to-close ratio, conversion rate)

Answer 17

Nb Accepted Quotes/Nb quotes

Question 18

What are the 2 categories of UW Expenses? How are they treated differentlty in the UW Expense Ratio

Answer 18

1. Incurred at policy’s inception (Commissions, other aquisition, taxes, licenses, fees) : Divided by written Premium
2. Incurred during the policy term (General expenses) : Divided by earned Premium

Question 19

What are some use cases of the UW expense Ratio?

Answer 19

1. Monitor uw ratio over time
2. 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

Question 20

3 criterias for exposures

Answer 20

1. Proportional to expected loss
2. Practical
3. Considerate of historical precedence

Question 21

2 rating methods for large commercial risks

Answer 21

1. Composite Rating
2. Loss-rated composite rating

Question 22

Verifications of data (4)

Answer 22

1. Consistency with financial statement data
2. Consistency with prior data
3. Reasonableness of data
4. Clarity and accuracy of data definitions

Question 23

Data considerations (4)

Answer 23

1. Limited Data
2. Multiple currencies
3. Large claims
4. Terminology differences

Question 24

3 general goals of data aggregation

Answer 24

1. Accurately match losses and premium for the policy
2. Use the most recent data available
3. Minimize the cost associated with gathering and retreving data

Question 25

Calendar year aggregation : Description, Advantages (3) and disadvantages (2)

Answer 25

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

Question 26

Accident year aggregation : Advantages (3) and disadvantages (2)

Answer 26

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

Question 27

Policy year aggregation (UW year aggregation) : Description, Advantages (2) and disadvantages (2)

Answer 27

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, ...)

Question 28

Report year aggregation : Description, Advantage (1) and disadvantage (1)

Answer 28

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

Question 29

The aggregation of losses is based on which 3 factors?

Answer 29

1. Choice of relevant statistics (Ex. paid or reported losses) 2. Data aggregation method (calendar, accident, policy, report) 3. 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)

Question 30

Written Exposure (Relation ship for both individual & group policies, for CY&AY)

Answer 30

Written exposure = EE + EoY UE - BoY UE

Question 31

Written exposure (Relationship for policy year)

Answer 31

WE = EE + UE (BoY = 0)