A.7. Insurer Performance and Profit

Question 1

Fundamental Insurance Equation

Answer 1

Premium = (Loss + LAE + UW Expenses) + UW Profit

Question 2

Total Profit for an Insurer

Answer 2

Total Profit = UW Profit + Net Investment Income

Question 3

Ultimate losses

Answer 3

Reported loss + IBNR + IBNER

Question 4

Reason FIE should be balanced at aggregate and individual levels

Answer 4

Aggregate: insurer stands to make its target profit
Individual: fair rates

Question 5

Three main objectives in aggregating data by time

Answer 5

1. Matching premiums and exposures to losses
2. Using the most recent data available
3. Minimizing the cost of data collection and retrieval

Question 6

CY advantages/disadvantages

Answer 6

A: no development, readily available
D: poor match in timing premiums and losses

Question 7

AY advantages/disadvantages

Answer 7

A: like CAY, but audits taking place after CY are over are incorporated into premium and exposure data. Better match
D: development in premium as well as losses

Isolates CATs

Question 8

CAY advantages/disadvantages

Answer 8

A: most common, better match than CY data
D: future development must be estimated

Question 9

RY advantages/disadvantages

Answer 9

Used mostly for claims-made. A: number of claims is known at end, so IBNER is easier to estimate. D: IBNR is difficult

Isolates changes in claims practices

Question 10

PY advantages/disadvantages

Answer 10

A: truest match of premiums and losses
D: takes longer to develop than AY

Isolates policy or underwriting changes

Question 11

Loss ratio formula and use

Answer 11

Loss ratio = losses/premium = pure premium/avg premium

Most common use is to use earned premium and reported or ultimate losses

Used to measure rate adequacy

Question 12

Average premium formula and use

Answer 12

Average premium = premium/exposures
(both should be on same basis - written/earned)

Changes come from both rate changes and changes in mix of business written

Question 13

UW Expense formula and use

Answer 13

UW Expense ratio = UW Expenses/Premium

= (commissions + other acquisition + taxes) / written + general expenses / earned premium

Used to monitor UW expense costs

Question 14

LAE ratio formula and use

Answer 14

LAE ratio = LAE / Losses

Used to monitor claims department costs

Question 15

Combined ratio formula and use

Answer 15

= Loss ratio + LAE / Earned + UW Expenses / Written
= Loss ratio + Operating expense ratio

Measures overall UW profit for insurers

Question 16

Operating expense ratio formula

Answer 16

OER = UW Expense ratio + LAE / Earned

Question 17

Close ratio formula and use

Answer 17

Close ratio = # accepted quotes / # quotes

Competitiveness measure

Question 18

Retention ratio formula and use

Answer 18

Retention ratio = # policies renewed / # potential renewals