Ch 9 Flashcards
the process of extracting hidden patterns from data that is used in a wide range of applications for research and fraud detection
Data Mining
What are the two most prominent actuarial activities?
1) ratemaking 2) estimating of unpaid liabilities and adequacy of loss reserves
What must an actuary consider when making rates?
Trends that may affect claim costs during the effective period of the rates. Must look at economic and regulatory factors.
What is a statutory annual statement?
A statement of opinion, by a qualified actuary as to whether the carried reserves make a reasonable provision for the liability.
What are some secondary tasks performed by actuaries?
-analyze reinsurance needs to determine how much risk the insurer should retain versus the cost of reinsurance. -estimate future cash flows so assets are available when claims are to be paid -assessing corporate risk by testing the adequacy of surplus under potential adverse situations (catastrophe, soft pricing) -providing financial and statistical information to regulators and applicable statistical agents. (With accounting and finance) -participate in corporate planning and budgeting
How do small insurers without actuaries determine rates?
Information from advisory organizations (actual rate or statistical data)
Why are actuarial consultants used?
-used by small insurers who don’t have their own actuaries. -can supplement staff actuary knowledge with socialized expertise and ease workload leaks. -regulatory authorities sometimes require insurers to provide a consulting actuary’s opinion verifying the accuracy and reasonableness of the staff actuaries’ work.
the process insurers use to calculate insurance rates, which are a premium component
Ratemaking
What is the primary goal of ratemaking from the insured’s perspective and how does it complement underwriting’s primary goal (develop maintain profitable book of business)
Develop a rate structure that backed the insurer to compete effectively while earning a reasonable profit in its operations. The insurer’s rates must be competitive to meet underwriting goals.
What are the five ideal characteristics of rates?
-be stable -be responsive (can conflict with stability) -provide for contingencies -promote risk control -reflect differences in risk exposure.
Why should rates be stable?
-Changing rates is expensive -Drastic rate changes can cause dissatisfaction or regulatory/legislative action.
What does rates being responsive mean?
They must respond to changes in external conditions (losses and expenses)
Which contingencies should rates provide for?
Unexpected variations in losses and expenses.
How do ratemaking systems promote risk control?
Provide lower rates for policyholders who exercise sound risk control (burglar alarms, automatic sprinklers)
What would happen if rates didn’t take differences in exposure into consideration?
anti-selection: they would end up with only higher-risk insureds. People with high risk would gladly pay an average rate and people with lower risk would write with a carrier with a lower rate.
What are the three components to an insurance rate?
1) An amount needed to pay future claims and loss adjustment expenses (prospective loss costs) 2) An amount needed to pay future expenses, such as acquisition expenses, overhead and premium taxes (expense provision) 3) An amount for profit and contingencies (profit and contingency factor)
The rate per exposure unit for insurance coverage.
Rate
The price of the insurance coverage for a specified period.
Premium
A variable that approximates the loss potential of a type of insurance. (for property this is the value being insured, for product liability, sales)
Exposure base
The average amount of money an insurer must charge per exposure unit in order to be able to cover the total anticipated losses for that line of business. (sometimes includes legal costs)
Pure Premium
The amount that is included in an insurance rate to cover the insurer’s expenses and that might include loss adjustment expense but that excludes investment expenses. It covers: -Acquisition expenses -General expenses -Premium taxes -Licenses and fees -Regulatory -Advisory organizations
Expense Provision (Underwriting Expenses)
Costs incurred by an insurer for operations, taxes, fees, and the acquisition of new policies.
Underwriting expenses
The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy. (ex. cost of in-house claims adjusters)
Loss Adjustment Expenses (LAE)
The expenses an insurer incurs to investigate, defend, and settle claims that are associated with a specific claim.
Allocated Loss Adjustment expenses (ALAE)
Loss adjustment expenses that cannot be readily associated with a specific claim.
Unallocated loss adjustment expenses (ULAE)
Income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses.
Underwriting profit
In the past insurer’s did not consider _____ results in rate calculations but now they are commonly included and may even be required in some states.
investment
Investment returns have a much larger effect on _____ insurance rates than _____ insurance rates because claims for these exposures are often not paid until years after the loss occurs.
liability / property
What are the five areas of uncertainty which affect ratemaking?
1) Estimation of losses 2) Delays in data collection and use 3) Change in the cost of claims 4) Insurer’s projected expenses 5) Target level of profit and contingencies
The final paid amount for all losses in one accident year.
Ultimate loss
Ratemaking is based estimating losses from______ ___________ __________ and adjusting those losses for _______ ____________.
Past coverage periods / future conditions
If loss reserve estimates are too low the rates will be too _____. If too high, the rates will be too _____.
Low / high
Demonstrate how inadequate reserving leads to inadequate rates. Ex. $30MM on total incurred losses for 3 year period and 300,000 car years (correct reserve) $28.5MM incurred losses (incorrect reserve)
Pure premium Correct: $30MM / 300k = $100 per car year. Incorrect: $28.5MM/ 300k= $95 per car year. For same exposure, insurer would be getting $5 less per car year.
What are the sources of delay in reflecting loss experience in rates?
-delay by insureds in reporting losses -time needed to analyze data and prepare rate filing -delay for rates being approved -time needed to implement rates -time period during which rates are in effect.
The period for which all pertinent statistics are collected and analyzed in the ratemaking process.
Experience period
What can cause fluctuation in loss experience. (Frequency severity)
Economic inflation or deflation Legislative or regulatory changes such as modification in rules governing claim settlement can affect the number of losses.
Provide an example of why you would not use past expenses to determine projected expenses.
A new commission plan could be in force and past commission would t be a good estimate of costs for new policies.
Interest, dividends, and net capital gains received by an insurer from the insured’s financial assets, minus it’s investment expenses.
Investment income.
Which factors does the target level of profit and contingencies come from?
Overall desired rate of return, including likely returns from investment income versus underwriting profit. If trying to build business might accept a lower rate of return.
What are the three ratemaking methods?
-pure premium method -loss ratio method -judgment method
A method for calculating insurance rates using estimates of future losses and expenses, including a profit and contingencies factor. (Independent of current rates)
Pure premium method.
What are the four steps in the pure premium method?
1) calculate pure premium 2) estimate expenses per exposure unit based on the insurer’s past expenses. 3) determine profit and contingencies factor 4) add pure premium and expense provision and divide by one minus the profit and contingencies factor.
Incurred losses = $4MM Earned car-years = 100,000 Calculate pure premium
$4MM/100k = $40
Expenses = $1.7MM Earned car-years = 100,000 Calculate expenses per exposure unit
$1.7MM/100k = $17
Assuming a 5% profit and contingencies factor and previous values, calculate the rate per exposure unit. Pure premium: $40 Expenses per exposure unit: $17
= pure premium + expenses per exposure unit / 1 - profit & contingencies factor $40+$17 = $57 / 1-.05 = .95 =. $60
How are fixed expenses and variable expenses stated when ratemaking?
Fixed: dollar amount ($2.00 per car year) Variable (commissions, premium tax): percentage of rate (ex 12% of final premium)
Calculate the rate using the pure premium method: $40 premium $2.50 fixed expenses 12% variable expenses 5% profit and contingencies
$40 + $2.50 / 1 - 0.12 - .05 $42.50/.83. = $51
A method for determining insurance rates based on a comparison of actual and expected loss ratios.
Loss ratio method.
Which two ratios does the loss ratio method use?
Actual loss ratio: incurred losses / earned premium Expected loss ratio: 100% - expense provision
What is the loss ratio ratemaking equation?
Rate change = actual loss ratio - expected loss ratio / expected loss ratio
Actual loss ratio: 54% Expected loss ratio: 60% Calculate new rates
.54 - .60 / .60. -.06/.60 = - 0.10 10% decrease
Which methods are used to calculate rates for new types of insurance?
Pure premium or judgment
A method for determining insurance rates that relies heavily on the experience and knowledge of an actuary or an underwriter who makes little or no use of loss experience data.
Judgment ratemaking method
Comparison of Aggregation Methods
Aggregation Methods
