Chapter 4 - Pricing

Question 1

What type of claim would the law of large numbers apply to and what does that mean about the claims?

Answer 1

High frequency low severity, predictable

Question 2

What does a low standard deviation mean about claims?

Answer 2

Stable claims history therefore predictable

Question 3

What is the law of large numbers?

Answer 3

Events will converge to an expected amoutn when large number of situations

Question 4

What is a return period?

Answer 4

Expresses how often a particular event is likely to occur

Question 5

What would reduce the value of historic data?

Answer 5

• moving from primary to excess business
• widening or narrowing cover
• change type of risk being insured

Question 6

What else is important other than statsitics for underwriters?

Answer 6

Knowing the client, may be taking risk management activities to ensure loss profile is reduced in future

Question 7

What is catastrophe modelling?

Answer 7

Allows insurers to take aggregation data and analyse impact to book of business arising out of disasters, applying probabilities to number of events

Question 8

What else can catastrophe modelling be used for?

Answer 8

Calculating risk premium depending on exposure to natural perils

Question 9

What is a deterministic approach?

Answer 9

One value for each parameter for a set level of probability and will provide one answer

Question 10

What is a probablistic approach?

Answer 10

Spread of values for each parameter, providing a spread of likely outcomes which can then be analysed

Question 11

What are the three sets of realistic disaster scenarios?

Answer 11

• 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

Question 12

What should premiums include?

Answer 12

• risk premium
• expenses of business
• costs of acquisition
• return on capital

Question 13

What would go into the setting of the risk premium?

Answer 13

• subject matter
• exposure
• cover offered
• rating factors
• historical claims experience
• large claims
• future

Question 14

What are rating factors?

Answer 14

Operate as loadings or discounts on base, e.g river next to a property = loading, sprinkler system = discount

Question 15

What are the expenses of the business?

Answer 15

• fixed costs
• variable costs
• claims handling
• reinsirance
• regulatory permissions
• levies

Question 16

What are the benefits of electronic placing?

Answer 16

• more efficient
• simultaneous quotations can be requested
• all documents stored online with full audit trail

Question 17

What is return on capital employed?

Answer 17

How well is a company generating profits from its capital

Question 18

What does a healthy profit allow an insurer to do?

Answer 18

• put aside capital reserves for future years

- offer dividend to shareholders

Question 19

What are burning costs?

Answer 19

amount of premium spent paying losses over time

Question 20

What are the downsides of using insurers own data on claims for pricing a risk?

Answer 20

• figures may not represent ultimate value
• inflation may not be factored
• trends

Question 21

What should be factored into reserve amounts?

Answer 21

• fully known claims
• ibnr
• ibner

Question 22

What is a rating model?

Answer 22

Model on generic data you can feed risk information into

Question 23

What is the pricing and monitoring minimum standard?

Answer 23

Managing agents should have effective pricing and rate monitoring framework in place

Question 24

What is the pricing methodology minimum standard?

Answer 24

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

Question 25

What is the pricing adequacy and rate cange management and monitoring minimum standard?

Answer 25

Managing agents must have mechanisms to manage and monitor adequacy of prices and changes in rates

i.e can we meet our business plan

Question 26

What is the price and rate monitoring, audit and review minimum standard?

Answer 26

Managing agents should have effective systems and controls in place to audit and review pricing and rate monitoring