Chapter 12 - Actuarial Investigations

Question 1

Cancellation

Answer 1

A mid-term cessation of a policy that may involve a partial return of premium

Question 2

Claims run-off analysis

Answer 2

A tabulation showing the speed of reporting or settlement for cohorts of claims. AKA reporting table/run-off triangle. Analysis may be for claim numbers of amounts. Used as an intermediate step in a chain ladder projection

Question 3

Commutation

Answer 3

The process of prematurely terminating a reinsurance contract by agreeing an amount to settle all current and future claims

Question 4

Commutation account

Answer 4

A register of the inflows and outflows after the commutation has taken place

Question 5

Commutation clause

Answer 5

A clause in an insurance or reinsurance contract that allows the contract to be commuted under certain conditions. The clause works in conjunction with commutation accounts, which are used to calculate the relevant numbers

Question 6

Delay table

Answer 6

Another name for a claims run-off analysis or run-off triangle

Question 7

Endorsement

Answer 7

A change in the policy wording, usually following a change in the risk covered, that takes effect during the original period of insurance and is usually, but not necessarily, accompanied by an alteration in the original period

Question 8

Functional costing

Answer 8

A process within an expense analysis to split the expenses of each line department between the different classes of business covered by the department. The process usually relies upon fixing the relative unit costs for each of the processes carried out by the department and counting the number of times that each of the processes is carried out over the period in question

Question 9

Lapse

Answer 9

When a policyholder, having been invited to renew the policy, does not do so, the policy is said to lapse

Question 10

Lapse rate

Answer 10

Usually defined as the ratio of the number of lapses in a defined period to the corresponding number of renewal invitations but could be another ratio associated with lapses.

Question 11

On level premium

Answer 11

Historic premium that has been adjusted to current rate level to be useful in projecting future premium.

Question 12

Partial payment

Answer 12

Partial claim settlement paid on account, before a claim is finalised or closed. Any claim for less than the full sum insured

Question 13

Persistency

Answer 13

A measure of the probability that a policy will remain in force at renewal, rather than lapse

Question 14

Profit testing

Answer 14

A term used for estimating the economic value of contracts using net present value techniques. Proposed premium rates are tested by projecting possible levels of future business, claims, expenses, investment experience and profit

Question 15

Rating structure

Answer 15

The relative level of premium charged to different policyholders, depending on their particular risk profile

Question 16

Deferred acquisition costs

Answer 16

Acquisition costs relating to contracts in force at the balance sheet date. They are carried forward as an asset from one accounting period to subsequent account periods in the expectation that they will be recoverable out of future margins within insurance contracts, after providing for future liabilities

Question 17

Direct expense

Answer 17

Expenses that we can allocate accurately to individual policies. Those that are incurred directly as a result of providing insurance cover and can therefore be directly allocated to a class of business of to an individual policy

Question 18

Indirect expense

Answer 18

AKA overheads. Non-direct expenses. Those that relate to general management and service departments that are not directly involved in new business acquisition or policy maintenance activities. Expenses that are insensitive to either the volume of new business of the level of business on the books

Question 19

Fixed expenses

Answer 19

Expenses that remain relatively fixed, regardless of how many policies are sold

Question 20

Variable expenses

Answer 20

Expenses that vary according to the amount of insurance business being handled

Question 21

Premium rate

Answer 21

A measure of how profitable a policy or segment of business is expected to be.

Question 22

New business rate

Answer 22

The ratio of the number of new policies for a period to the number of renewals invited for a period

Question 23

Strike rate

Answer 23

Number of written policies divided by the number of quoted policies in a given period. AKA conversion rate. Complement of the not-taken-up rate

Question 24

Declinature

Answer 24

Where an insurer refuses to provide cover

Question 25

Cancellation rate

Answer 25

Can either refer to:
> The ratio of number of cancellations during a period to the number of policies exposed for a period
> The ratio of number of cancellations during a period to the number of renewals invited for a period

Question 26

Endorsement rate

Answer 26

The ratio of the number of endorsements during a period to the number of policies exposed for a period