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Actuarial F203 - General Insurance > Chapter 10: Pricing large commercial Risks > Flashcards

Chapter 10: Pricing large commercial Risks Flashcards

1
Q

“Large risk”

A

A risk or group of risks which are - to some extent - unique.

Therefore the calculations done only apply once - to that risk.

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2
Q

W.r.t. large commercial risks,

Actuaries can be involved in (8)

A
  • calculating the minimum technical rate
  • acting as a second pair of eyes
  • auditing
  • signing off licence agreements
  • underwriting advice
  • designing rate monitoring and data capture systems
  • accumulation control
  • negotiation with:
  • – third parties
  • – agents/brokers
  • – client risk managers
  • – finance deparment
  • – underwriters and negotiaters
  • – claims department
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3
Q

In order to understand the nature of the client, the actuary should consider (7)

A
  • whether the client is a new business proposition or a renewal
  • the reason the client needs cover
  • whether the client requires cover in many territories
  • whether the client has changed significantly over time
  • any changes in processes that could affect the nature of the risks
  • the client’s level of risk management
  • any existing similar clients
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4
Q

Before accepting a risk, the actuary should also consider …

A

the existing risks and control structure

e.g. underwriting guidelines and accumulation control

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5
Q

Data on a risk can be held by (3)

A
  • the client themselves
  • their broker / agent
  • the insurer
    or by any combination of these
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6
Q

Data can be received as (2)

A
  • data download (either pure or processed)
  • management report
  • bordereau
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7
Q

Policy data will include (4)

A
  • list of policies (with some rating factor and sum insured info)
  • number of policies sold
  • premium written
  • total sum insured
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8
Q

Claims data will include (5)

A

Claim details:

    • dates
    • payment amounts
    • amounts outstanding
  • triangulation data
  • list of large claims
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9
Q

3 Other data sources

A
  • survey reports
  • client details (website and annual reports)
  • other background information (from broker/agent/client)
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10
Q

To calculate a technical price, the actuary should (2)

A
  • understand every aspect of the risk and cover that affects cash flows
  • calculate a price based on the data available
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11
Q

Standard techniques used to calculate a technical price are (4)

A
  • burning cost
  • frequency/average approach
  • simulation
  • market models
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12
Q

The price may be adjusted once negotiations have taken place.

Negotiations can include (4)

A
  • underwriter explanation
  • transparency meetings
  • product design
  • data capture
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13
Q

The whole portfolio of risks should be managed effectively.

This will consider (7)

A
  • the ultimate expected performance of recent underwriting years
  • capital requirements
  • rate increases on renewed risks
  • the performance of lapsed risks
  • expected performance of new business
  • how the total technical premium compares to the total actual premium
  • competitor performance
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14
Q

Large risks can be vastly different in terms of (4)

A
  • size
  • occupation
  • construction
  • susceptibility to natural disaster
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15
Q

How are large risks underwritten?

A

Individually.

The underwriter uses the unique information about the risk to dictate terms and conditions.

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16
Q

As companies get larger, their circumstances change, providing various challenges to the pricing actuary (5)

A
  • Larger companies will typically carry out more than one type of work.
  • The level of the insurance premium for larger companies is in most cases more and therefore the underwriter can afford to spend more time assessing each risk.
  • The level of the insurance premium for larger companies is more and therefore the underwriter can afford to spend more time assessing each risk.
  • The exact terms and conditions of cover and the levels of sums insured change from being the same for each risk to being subject to negotiation.
  • Claims may be handled up to a limit by the large company in-house, or by its preferred claims handling company, and not the insurer for whom the pricing actuary works.
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17
Q

Scheme

A

A contract between an insurer and another institution whereby the insurer insures a group of third parties agreed under the contract.

I.e. a group of insured risks priced collectively under one contract.

18
Q

Affinity group

A

A group of individuals with something in common.

They are linked by a common interest or purpose.

19
Q

Managing general agent (MGA)

A

A firm authorised by the insurer to sell insurance on the insurer’s behalf.

In South Africa, they’re referred to as Underwriting Management Agencies (UMAs)

20
Q

Line slip

A

A form of delegation of authority to sell insurance.

A line slip is an agreement made between underwriters and a broker whereby a few underwriters will allow a lead underwriter to underwrite and bind risks on their behalf.

The lead underwriter will usually take a significant share of the risk and the follow underwriters will usually take smaller shares.

21
Q

Bancassurance

A

A bank’s insurance subsidiary distributing its own products through bank branches.

22
Q

Verticalisation

A

Where the different co-insurers have different terms (premium rates), typically the leader terms and the follower terms.

In a soft market, the difference between lead and follower terms tends to be greater than in a hard market.

23
Q

Possible reasons for a large commercial client to seek insurance

A
  • legal reasons (e.g. motor insurance)
  • avoid volatility in the profit
  • anti-selection (looking to pass on bad risks)
24
Q

Pricing for multinational programmes should reflect … (3)

A

local differences

e. g.
- claims consciousness
- higher legal costs
- pro-plaintiff judgements

higher costs to the insurer

  • cost of local legal compliance
  • survey costs
  • collecting premiums
  • claims handling

benefits from geographical diversification for the insurer
- reduce the capital requirements

25
Q

Risk management

A

Tools and processes in place to reduce the risk that can lead to potential claims

26
Q

List the major risk management tools used by general insurers

A
  • reinsurance
  • underwriting
  • diversification
  • financial engineering
27
Q

Underwriter licensing (issued by insurer as risk control measure)

A

Each underwriter has a licence which allows him or her to write risks of a certain type or up to a certain sum insured.

28
Q

Underwriting guidelines

A

The limits placed on underwriter licences.

Typically there will be a limit beyond which even the head of the line of business cannot expose the company and which must be referred to board level.

29
Q

Underwriting guidelines can be used to (2)

A
  • limit exposure to accumulations of risk

- ensure that sufficient scrutiny is given to the largest or most unusual risks before the insurance is bound

30
Q

Large risks tend to differ from smaller risks in 4 ways

A
  • non-standard covers
  • unique covers for each client
  • extra covers often thrown in
  • differing deductibles for different covers
31
Q

6 Examples of unusual types of liability cover available

A
  • retroactive employer’s liability or public/products liability covers
  • financial loss extensions
  • residual/excess employers’ liability
  • personal and advertising injury
  • vendor’s liability
  • environmental liability pollution
32
Q

Financial loss extensions

A

Add consequential loss to standard liability cover

33
Q

Personal / advertising injury

A

Cover the policyholder for any damages caused by inappropriate advertising (libel or slander)

34
Q

Vendor’s liability

A

Liability cover for vendors or exhibitors at exhibitions and trade shows.

35
Q

Types of data that may be received from an intermediary (broker/agent) or the client

A

Policy data

  • list of policies (potentially with rating factors included, sum insured and deductible info)
  • number of policies sold and premium written for the period of the report
  • total sum insured for the period of the report

Claims data

  • list of claims as at the date of the report with associated dates, payments to date and the current outstanding claims
  • number of claims and total paid and outstanding claims as at the date of the report
  • claims development triangles as at the date of the report
  • large claims list for an agreed threshold
36
Q

2 Key stages in arriving at a technical price

A
  • understanding every aspect of the risk and insurance terms and conditions that could lead to cash inflows or outflows
  • technical pricing based on the data available
37
Q

burning cost for each year

A

ultimate claims divided by the exposure

Actual historic cost of claims, expressed as a rate per unit of exposure.

38
Q

Practicalities when using the burning cost

A
  • how much credibility to give client-specific data
  • much commercial business is priced by giving some weight to the insured’s own experience and some weight to the “book” rates.
  • how to estimate the cost of large claims (Increased limit factors / original loss curves) may be useful
  • how to estimate the cost of covers not represented in the claims experience
  • how to deal with inflation
  • how to deal with unequal policy periods.
39
Q

Simulation approach to calculating a technical price

A

Fit statistical distributions to the historical claims numbers and averages using curve-fitting software or by other (formula-based) methods.

Having chosen the distributions, we do simulations of many future scenarios from which we can price many features of the policy.

We should be aware of potential errors in using simulations, especially where data are sparse. We should communicate this to the underwriters.

40
Q 
Market models (exposure rating)
as an approach to calculating a technical price
A

It may be very difficult to come up with a technical premium derived from the claims experience of a single risk.

One approach is to take a view of the total claims across the whole industry expected in the coming year.
Next, we apportion this total amount across the market, based on measures of exposure (e.g. number of aircraft) and measures of risk (quality of pilot training and aircraft maintenance)

41
Q

Roles an actuary might play in negotiation of a premium (4)

A

Underwriter explanation
It’s important for the underwriter to feel comfortable with the data and methodology used by the actuary in arriving at the technical price.

Transparency meetings
The actuary may be required, or may want to present a point of view to the client or broker.

Product design
Through a thorough appreciation of technical and business issues, actuaries may provide alternative designs which give comfort to the underwriter, but at the same time provide value / covers required by the lcinet.

Data Capture
Designing systems which record the results of negotiations.

42
Q

Information required to review/monitor a portfolio of large risks

A
  • the ultimate expected performance of recent underwriting years based on a reserving exercise
  • CAPITAL REQUIRED for the portfolio
  • rate increase on risks which have been renewed,
  • performance of lapsed business
  • expected performance of new business
  • technical premium REQUIRED for the whole portfolio vs the total ACTUAL premium
  • performance of other similar portfolios in the market

Actuarial F203 - General Insurance (43 decks)

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