Chapter 18 - Rating Methodologies & Bases Flashcards
Capacity
The amount of premium income that an insurer is permitted to write or the maximum exposure that could be accepted (possibly based on capital requirements). It could refer to an insurance company, a Lloyd’s Name, a Lloyd’s syndicate or a whole market
Credibility
A statistical measure of the weight to be given to a statistic. Denoted as Z in the credibility formula
Office premium
The total premium charged for the period of cover. This premium will contain the risk premium, commission, an allowance to cover all other types of expenses, an allowance for any premium tax and a profit loading.
Product costing
Product costing is the calculation of the theoretical office premium to be charged for a particular costing
Product pricing
Determination of the actual office premium. This is the office premium after taking account of current market conditions, called the technical premium
Rating basis
The collection of assumptions used to associate the risk premium with the characteristics of the risk being insured
Risk premium
The premium required to cover the claims expected for a risk. Equal to the average claim severity times the average claim frequency. May also be expressed as a rate per unit of exposure. May be referred to as the ‘pure risk premium’
Burning cost
The actual cost of claims incurred during a past period of years expressed as an annual rate per unit of exposure
Credibility formula
Estimate = Z x (Observation) + (1-Z) x (Other information) , 0<=Z <= 1
Harwayne’s method
Relating to credibility theory, particularly the compliment of credibility. It is a method used to to adjust data from a related, usually a larger group, class.
Hurley’s method
Relating to credibility theory, particularly the compliment of credibility. The method assigns the complement of credibility to be the loss ratio for a larger class (SIG(Loss Amounts)/SIG(Exp))
Court award inflation
The increase in claim amounts attributed to awards from court processes. Usually at a rate above standard inflation
Return period
With regard to large or catastrophe claims. This is how often we would expect such an event to generally occur (e.g. once every n years)
