9 - Establishing the price - rating factors Flashcards
What is MI and how does it help an insurer plan?
Management Information - data that the insurer can use to analyse trends and make forecasts about the future to assist in their planning
What are the 3 levels of decision making for a typical insurer?
- Board level
- Underwriting Managers
- Operational
What sort of information is reported on at board level?
Directors are concerned with group performance/profitability, the downside of the risk and broad strategy implementation.
Issues at this level include:
Growth (gross and net written premiums, net of reinsurance)
Loss ratios
Underwriting profit
Mix of lines of business
Exposures (eg are they too exposed in a particular line of business/geographic area)
Return on capital (profit as a %age of capital)
Solvency
Competitiveness
Downside risk control (eg reinsurance)
What sort of information is reported on at underwriting managers level? How often in general?
Usually monthly
Growth by line of business
Retention rates (how many renewals)
How much new business is won
Analysis of lost business
Loss ratios
Claims (trends, large losses, underlying claims, NatCat)
Rate and premium increases
Costs (commission and expenses)
Areas of high exposure
Competitiveness
Reserving
What sort of information is reported on at an operational level? How often in general?
Usually monthly, sometimes weekly
Customer service
New business and retention
Rate increases
Loss ratio
Credit management
Contract certainty
Why would an underwriter or underwriting manager need to analyse claims information?
To make predictions about future losses and set premiums accordingly to cover anticipated claims
What are the some of the things an underwriter will consider when analysing past claims data?
Are they increasing or decreasing?
What are the causes?
Are claims reserves accurate?
Are there any large outliers?
Are there any underlying claims?
How are the claims reported on?
What is meant by the term personal injury discount rate? Explain how this is set and why it is used?
When a policyholder makes a claim for a significant personal injury, the settlement is adjusted based on the personal injury discount rate. This is set by the Lord Chancellor to take into account the amount the insured could reasonably expect to earn by investing the lump sum.
This is made because the purpose of insurance is to indemnify the policyholder - return them to the same financial position they were in before the loss. A lump sum payment would rarely need to be spent all at once, so the insured would earn interest on the majority of it. This would place them in a better financial position than they would otherwise have been. Therefore a deduction is made from the settlement to account for this
What is the current personal injury discount rate? What does this mean for insurers and insureds?
- 0.25%
It means that the costs of settling these types of claims are higher for insurers, and these costs may be passed on to consumers leading to higher premiums for policyholders
What two main factors are used in assessing risk?
Frequency and severity
How are frequency and severity usually related?
In general as severity goes up, frequency goes down
Why do insurers prefer high frequency, low severity risks?
Due to the law of large numbers and homogenous exposures they are easier to predict. They can also be excluded from claims by setting a suitable excess
What is meant by the term underlying claims cost?
Underlying claims are the high frequency, low severity claims which are easier to predict and should be approximately proportional to the exposure. A certain percentage of the premium will be exposed to the underlying claims cost
Why do insurers not like low frequency, high severity, claims?
They are less predictable and much more serious, leading to high volatility
In what 3 scenarios may reinsurance apply?
Specific large losses
Large losses due to a single event effecting an accumulation of exposures
The accumulation of events over a specific period
Give some examples of scenarios that could lead to an accumulation of risk?
Insuring a number of insureds in the same area who could all be affected by a single flood or storm
Insuring a number of businesses occupying the same office building
A fire which could spread through a number of buildings
Insuring both the landlord and tenant of a property
What is the claims loss ratio?
The ratio of claims to premiums
Claims Ratio = (Claims Incurred/Premium) x 100
A business has paid a total of £200,000 for their employer’s liability and has made claims totalling £125,000. What is their claims loss ratio?
62.5%
(125,000 / 200,000) x 100 = 62.5%
Why are claims loss ratios used?
They are a useful indicator of how an account is running and it’s profitability
What is meant by earned premium?
The portion of the premium that has been paid for the time on the policy which has expired.
For example if a policy is halfway through it’s period, 50% of the premium has been earned
A 12 month policy has a total premium of £1,000. What is the earned premium after:
A) 3 months
B) 6 months
C) 9 months
D) 12 months
A Earned premium=Total premium/365*Number of days elapsed
A) £250
B) £500
C) £750
D) £1,000
What is an earned loss ratio (ELR)?
The ratio between claims and earned premium
(Claims Incurred / Earned Premium) x 100
Why may an earned loss ratio be adjusted? At what level would this occur?
To reflect reinsurance spend and incurred but not reported claims - at account level
What is outstanding loss ratio (OLR)?
The ratio between outstanding claims, which have been reported but not settled, and premium (100% premium, it does not take into account what has and has not been earned)
