Chapter 10 Flashcards
What is risk premium?
Expected ultimate cost in claims of the risk being accepted, including allowance for degree of uncertainty attaching to claims cost
(Premium to cover the total cost of claims recognising that some may take a while to settle)
What are the key features of risk premium?
- Frequency
- Severity
- Large claims
- Reinsurance
- Claims run off
- IBNR claims
- Catastrophe claim
- Latent claims
- Claims inflation
- Exposure
- Fraud
- LASPO 2012
How does frequency factor into risk premium?
Expected number of claims should be forecast accurately and account for anticipated changes in environment, portfolio of risks and individual risks
How does severity factor into risk premium?
Average cost of different claims should be assessed, allowance for catastrophes
How do large claims factor into risk premium?
Smaller insurers less able to absorb. Use of periodic payment orders have increase serious PI claims cost
How do catastrophe claims factor into risk premium?
Reflect the accumulation of large number of claims arising from a common event eg hurricane
How do latent claims factor into risk premium?
Liability classes - extreme form of IBNR as take up to 50 years to develop eg asbestos
How does exposure factor into risk premium?
Claims data is historical so should be adjusted to reflect today’s exposure
What are the two types of expenses?
- Fixed - cost doesn’t increase with size of risk, fixed amount per policy
- Variable - vary according to size, complexity and nature of risk
Variable expenses - UW
MTAs, risk management, helplines provided irrespective of claims
Variable expenses - Commission
Vary by product and case by case
Variable expenses - Claims handling
Cost varies according to number and complexity, should be a charge per claim
Variable expenses - Other expenses
Incur costs for policies they sell
What is return on capital employed (ROCE)?
Risk capital requirement calculated by actuaries and is the proportion of total account premiums which must be kept as free reserves to ensure the insurer can meet it’s claim obligations
Return (profit) is measured as a proportion of the capital employed (ROCE)
What is investment income?
Required by law to maintain certain levels of reserves based on total premium income (to pay for future claims)
Allowed to invest this income
What is the UW result?
Business result without investment income - combination of LR, commission ratio and expense ratio (combined operating ratio)
What two broad classes of investment to insurers balance their portfolio between?
- Interest bearing
- Equities (value expected grow in lien with economy, volatile in short term)
What happens if contributions of capital gain and are ignored?
Returns understated and products are overprices and uncompetitive
What are the forms of taxation?
Pure - IPT
Quasi-taxation - levies form MIB, FSCS and Mesothelioma Act 2014
What happens if capital gains are included?
Investment returns are likely to be volatile
What is the levy from FSCS?
Surcharge based on % of gross direct premium to fund claims by policyholders who insurers have become insolvent
What is the levy from the MIB?
Annual levy, higher rates for non-comprehensive private motor and fleet
What is the levy for the Mesothelioma Act 2014?
Cancer of lungs following exposure to asbestos, long time to manifest
Levy charged on EL premium to fund Diffuse Mesothelioma Payment Scheme which allow those suffering but unable to trace employers to obtain financial support
