2. The Ratemaking Process Flashcards
Ratemaking Principles (4)
- A rate is an estimate of the expected value of future costs
- A rate provided for all costs associated with the transfer of risk
- A rate provided for all costs associated with an individual risk transfer
- A rate is reasonable and not excessive, inadequate or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer
Ratemaking considerations (10)
- Exposure unit
- Data
- Organization of Data
- Influences of Data
- Adjustments to Data
- Homogeneity
- Credibility
- Classification Plans
- Individual Risk Rating
- Actuarial Judgment
Influences on data (4)
- Policy Provisions (Salvage, subrogation, coninsurance, limits, deductibles)
- Mix of Business (Change in distribution of limits/deductibles)
- Operational Changes (UW process, claim handling, claim reserving, marketing)
- Other influences (Judicial environment, regulatory/legislative changes)
Adjustments to data (7)
- Large losses
- Reinsurance
- Benefit and Rate adjustments
- Development
- Trends
- Expenses
- Profit and contingency provision
Determining Shock loss provision (4 steps)
- Sum shock losses (or excess losses)
- Sum non-shock losses (Or non-excess losses)
- Calculate the ratio of shock losses to non-shock losses (Or excess to non-excess)
- Calculate the shock loss loading factor (Or excess loading factor) as 1 + the ratio found above
Possible tresholds for shock losses other than basic limit (2)
- Percentile
- % of amount of insurance
For shock losses : why is using basic limit as a treshold not always appropriate?
There can be a significant amount of losses above that limit, for example in auto basic limit can be the amount required by law, but many insured select above that limit
What is the difference between modeled catastrophe losses and non-modeled catastrophe losses?
- Modeled : events that occur infrequently but result in high severity (Ex. EQ)
- Non-Modeled : events that happen regularly over a period of time (ex hailstorm for auto)
What are the 2 methods for determining non-modeled cat loss provision?
- CAT loss loading factor
- CAT loss pure premium
What are the steps to calculate CAT losses loading factor (4)?
Same as shock loss provision
1. Sum the CAT losses
2. Sum the non-CAT losses
3. Calculate the ratio of CAT losses to non-CAT losses
4. Calculate the cat loss loading factor as 1 + ratio
What are the steps to calculate the CAT loss pure premium (3)?
Develop a pure premium or loss ratio just for the non-modeled CAT exposure
- Calculate the ratio of non-modeled CAT losses to AIY for each year in the experience
- Average the CAT-to-AIY for all years
- Apply the non-modeled CAT provision per AIY to the average AIY per exposure expected in the future to get non-modeled CAT pure premium
Name ways of limiting the number of policies issued in catastrophe-prone areas (4)
- Increase the UW profit provision to reflect the increased cost of capital (Changing pricing)
- Purchasing reinsurance
- Resticting the writing of new policies in an area
- Requiring higher deductibles for CAT-related losses
What are the 2 types of reinsurance + brief description
- Proportional Reinsurance :
Same proportion of premiums and losses are ceded to the reinsurer - Non-Proportional Reinsurance :
Insurer ceded a portion of premium to the reinsurer, who agrees to assumes a pre-defined portion of losses (Reinsurance coverables) (ex : x% of losses above a treshold)
What adjustment is needed for reinsurance in ratemaking analysis?
- Proportional reinsurance : may not need adjustment
- Non-proportional reinsurance :
2.1. Reduce the projected losses for any expected recoveries from non-proportional reinsurance
2.2. Reduce the total premium by the cost of reinsurance (Amount of premium ceded)
Alternatively : net cost of non-proportional reinsurance can be included as an expense item in the overall rate indication
Examples of direct effects of rate or benefit changes (4)
- Increasing the rate charged on a policy
- Decreasing a policy limit
- Increasing max duration for workers comp
- Removing coverage
