Chapter 4 - Pricing Flashcards
What type of claim would the law of large numbers apply to and what does that mean about the claims?
High frequency low severity, predictable
What does a low standard deviation mean about claims?
Stable claims history therefore predictable
What is the law of large numbers?
Events will converge to an expected amoutn when large number of situations
What is a return period?
Expresses how often a particular event is likely to occur
What would reduce the value of historic data?
- moving from primary to excess business
- widening or narrowing cover
- change type of risk being insured
What else is important other than statsitics for underwriters?
Knowing the client, may be taking risk management activities to ensure loss profile is reduced in future
What is catastrophe modelling?
Allows insurers to take aggregation data and analyse impact to book of business arising out of disasters, applying probabilities to number of events
What else can catastrophe modelling be used for?
Calculating risk premium depending on exposure to natural perils
What is a deterministic approach?
One value for each parameter for a set level of probability and will provide one answer
What is a probablistic approach?
Spread of values for each parameter, providing a spread of likely outcomes which can then be analysed
What are the three sets of realistic disaster scenarios?
- compulsory, all must do, things like california eq
- specific, only report if above a threshold, things like liability / political risks
- two syndicate defined scenarios, one windstorm one eq in a non-compulsory location
What should premiums include?
- risk premium
- expenses of business
- costs of acquisition
- return on capital
What would go into the setting of the risk premium?
- subject matter
- exposure
- cover offered
- rating factors
- historical claims experience
- large claims
- future
What are rating factors?
Operate as loadings or discounts on base, e.g river next to a property = loading, sprinkler system = discount
What are the expenses of the business?
- fixed costs
- variable costs
- claims handling
- reinsirance
- regulatory permissions
- levies
What are the benefits of electronic placing?
- more efficient
- simultaneous quotations can be requested
- all documents stored online with full audit trail
What is return on capital employed?
How well is a company generating profits from its capital
What does a healthy profit allow an insurer to do?
- put aside capital reserves for future years
- offer dividend to shareholders
What are burning costs?
amount of premium spent paying losses over time
What are the downsides of using insurers own data on claims for pricing a risk?
- figures may not represent ultimate value
- inflation may not be factored
- trends
What should be factored into reserve amounts?
- fully known claims
- ibnr
- ibner
What is a rating model?
Model on generic data you can feed risk information into
What is the pricing and monitoring minimum standard?
Managing agents should have effective pricing and rate monitoring framework in place
What is the pricing methodology minimum standard?
Managing agents should have appropriate pricing methodologies
- benchmark premiums take into accout expenses
- pricing supported by experience / data and within a model
- models reviewed annually etc
