Chapter 12: Actuarial Investigations Flashcards
6 Steps involved in rating analyses
- estimating ultimate claims
- estimating profitability of existing rates
- projection forward to a new rating period
- reviewing the suitability of the existing rating structure
- comparing rates with those of competitors
- analysing the profitability of old years on new rates
Rating analyses:
Estimating ultimate claims
The new premium rate for a policy will be based on the expected cost of claims for that policy.
We estimate this cost using recent claims experience from the existing portfolio.
Rating analyses:
Estimating profitability of existing rates
Estimate the profitability of the existing premium rates by reference to the recent claims experience, adjusted if necessary for any abnormal features.
We will look at the claims corresponding to the premium and compare actual and expected experience.
Rating analyses:
Projection forward to a new rating period
Project forward to the period over which the new rates will be charged and the corresponding claims will be settled.
In doing this, we make assumptions about future claims trends and inflation.
rating structure
The relative levels of premium charged to different policyholders, depending on their particular risk profile.
Rating analyses:
Comparing rates with those of competitors
In making the final pricing decision, we will be strongly influenced by what the market is doing.
Our premium rates must make allowance for our competitors’ rates.
What should be done when entering a new market with no suitable data from its own experience? (4)
- We may be able to use some relevant external data or internal data from related accounts.
Alternatively, we could:
- as reinsurers
- partner with another insurer on a quota-share basis and use their data
- use market data such as Lloyd’s
4 Sources of “relevant external data”
- reinsurers’ data
- industry data
- other insurers’ data
- relevant organisations or government bodies
Define “deferred acquisition costs”
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 accounting period in the expectation that they will be recoverable out of future margins within insurance contracts, after providing for future liabilities.
4 parts of expenses analysis
We:
- split between DIRECT VS INDIRECT expenses
- split between TYPES OF EXPENSE (initial, admin, renewal, claims, investment)
- allocate by CLASS AND RATING GROUP
- express the expenses as a proportion of numbers of policies or claims, or of amounts of premium, sum insured or claim
Direct expenses
Those expenses that can be directly allocated to a class of business
Indirect expenses
(overheads)
Relate to support functions, and therefore cannot be directly attributed to any one class of business or policy.
Non-commission expenses can be split into (5)
- initial expenses
- administration expenses
- renewal expenses
- claims expenses
- investment expenses
Initial expenses
Arise when business is being acquired and written into the books of the insurer
Renewal expenses
Incurred in the recosting, renewing or lapsing of a policy at the end of the policy period.
Claims expenses
Incurred in the assessment and payment of policyholder compensation.
Initial, administration and renewal expenses
can be loaded according to whether the expenses is proportional to: (3)
- the number of contracts being acquired or on the books
- the amount of sum insured or EML
- the amount of premiums being acquired or on the books
Most expenses are proportional to the contracts in force, with 2 exceptions:
- underwriting expenses (mainly related to the amounts of new business premium)
- claims expenses (related to the level of claims payout, with higher expenses for larger claims)
Fixed expenses
The expenses that remain relatively fixed (in the short term),
regardless of how many policies we sell
Variable expenses
Expenses that vary according to the amount of insurance business being handled.
They may be linked to the number of policies, claims or the amount of premiums.
Main items of a general insurers expense are:
- salaries and salary-related expenses
- property costs (rent, property taxes, heating, lighting and cleaning)
- computer costs
- investment costs (investment dept, stamp duty, commission, etc.)
- one-off capital costs
- claims handling costs
The process of allocating expenses
Expenses are split down and analysed into required “cells”, being:
- whole business of the insurer
- whole business of a particular accounting fund
- each main product line of the insurer
Why might an insurer want to allocate expenses to different product lines?
To accurately as possible ensured that
- the premium charged to each class is correct, and
- the profitability of each class is assessed correctly.
Staff salaries can be split into 3 groups:
- staff whose work falls entirely within a single cell of the analyses
- staff whose work falls within more than one cell
- other staff
10 types of reinsurance investigations
Analyses of:
- the REQUIRED RISK RETENTION allowing for the solvency position
- the extent of exposure to ACCUMULATIONS OF RISK
- the need for CATASTROPHE reinsurance
- the need for REINSTATEMENTS
- the VALUE FOR MONEY of existing reinsurance
- the APPROPRIATENESS of existing cover
- the PROFITABILITY of layers
- the effects on CAPITAL
- the cost of COMMUTATION
- to check on the REINSURERS’ SOLVENCY LEVELS and assess the need for a bad debt provision.
Commuting a reinsurance contract
Means that the insurer accepts a fixed premium now and the reinsurer does not make any future payments to the insurer.
ie the insurer swaps future recoveries for a fixed sum.
Why are commutations used?
An insurer may wish to commute a reinsurance arrangement:
- if it helps with the insurer’s cashflow, or
- if it is concerned about the solvency of the reinsurer.
Describe the consequences for an insurer of taking out TOO LITTLE REINSURANCE.
If too little reinsurance is used, and experience is worse than assumed, there is a risk of
- sharply reduced profit and
- lower published solvency, or even
- insolvency
for the insurer.
Describe the consequences for an insurer of taking out TOO MUCH REINSURANCE.
If too much reinsurance is used then the reinsurer will be profiting at the insurer’s expense in the long term.
7 Main reasons for monitoring business written
- assess performance against goals
- manage risk
- gain market intelligence
- satisfy the regulators
- influence the market
- assist with reserving
- validate assumptions as part of the actuarial control cycle
4 key factors monitored (in business monitoring)
- premium rate changes
- portfolio movements
- volumes of quotations
- persistency and profitability by source
