B.7. Overall Rate Indications

Question 1

DIfferences between Pure Premium and Loss Ratio methods

Answer 1

1. LRM relies on loss ratio, which requires premium in denominator. Current premium must be available, on-leveled, developed, and trended. PP relies on pure premium, which requires exposures in the denominator – need to be well defined
2. Output of two methods is different. PP produces indicated rate, LRM produces indicated rate change

Question 2

Coverage Trigger

Answer 2

An event that must occur in order for an insurance policy to apply a claim

Question 3

Two types of coverage triggers

Answer 3

Occurrence: the occurrence of the accident

Claims-made: repoting of claim

Question 4

Purpose of retroactive date provision

Answer 4

Retroactive provision limits claims covered under a claims-made policy to only claims that occur after the first claims-made policy term. The provision prevents coverage overlap with any prior occurrence policies

Question 5

Purpose of extended reporting endorsement

Answer 5

To allow for claims that occur during a claims-made policy period, but are reported after the policy expires. Commonly used when insured retires or switches from claims-made to occurrence

Question 6

Claims-Made Ratemaking Principles

Answer 6

1. A claims-made policy should always cost less than an occurrence policy as long as claim costs are increasing
2. If there is a sudden unpredictable change in trends, CM policy priced based on prior trend will be closer to correct price
3. If there is a sudden unexpected shift in reporting pattern, cost of mature claims-made policy will be affected very little relative to occurrence policy
4. Claims-made policies incur no liability for pure IBNR, so risk of reserve inadequacy is reduced
5. Investment income from CM policies is significantly less.