Chapter 1 - Introduction Flashcards
What is a Exposure?
An Exposure is the basis we use to measure risk
What is a Premium?
Premium is what the insured pays to the insurer for insurance coverage.
What is a Claim?
A Claims is the demand of payment due to a covered event occurring.
What is a Loss?
A Loss is a dollar amount of compensation paid or payable to a claiment under the term of the policy.
What are the Loss Adjustment Expense (LAE)?
The Loss Adjustment Expenses are the expenses incured during the claims settlement process. Some are Allocated (ALAE) to individual claim, while other can’t be allocated (ULAE).
What are Underwriting Expenses?
They are expense incurred in the acquisition and serving of policies. They can be classified into 4 groups
- Commissions and Brokerage - amount paid to agents or broker in compensation of generating business.
- Other Acquisition - other amount paid for acquiring business including media advertissement and mailing.
- General - are the remaining cost of the insurance operation including building location and salaries.
- Taxes, Licences and Fees - include all taxe and miscellaneous fees paid by the insurer (exclude federal income tax)
What is Underwriting Profit?
Benefit of the insurer for assuming the risk.
Premium minus Losses and Expenses.
What is Fundamental Insurance Equation?
Premium = Losses + LAE + Uw Expenses + Uw Profits
What is the goal of Ratemaking?
The goal of Ratemaking is to set the premium to the level that balance the Fundamental Insurance Equation for the prospective period, both in aggregate and individual levels.
Frequency
Claims / # Exposures
Severity
Losses / # Claims
Pure Premium
Losses / # Exposure = Frequency x Severity
Loss Ratio
Losses / Premium = Pure Premium / Average Premium
LAE Ratio
Loss & LAE Ratio
Loss Ratio x (1 + LAE Ratio) = (Losses + LAE) / Premium
