Chapter 7

Question 1

what are the components of gross rate?

Answer 1

-prospective loss costs (pure premium)
-expense provision (load)
-margin for profit and contingencies (risk charge)

Question 2

what is prospective loss costs?

Answer 2

amount needed to pay future claims and loss adjustment expenses

Question 3

what is expense provision (“Load”)?

Answer 3

amount needed to pay expenses (acquisitions costs, overhead, premium taxes)

Question 4

what is margin for profit and contingencies (“risk charge”)?

Answer 4

amount needed to protect against the possibility that actual claims and expenses exceed projections

Question 5

what are loss adjustment expenses (LAE)?

Answer 5

expenses associated with adjusting claims

Question 6

what is an exposure unit?

Answer 6

unit of measurement used in pricing (car-years, per $1000 in limits, etc)

Question 7

what is the formula for gross premium?

Answer 7

gross rate * number of exposure units

Question 8

what are the property and casualty ratemaking methods?

Answer 8

-class manual rating
-merit rating
-judgment method

Question 9

what methods are under class manual rating?

Answer 9

-pure premium method
-loss ratio method

Question 10

what is pure premium method?

Answer 10

rates developed based on past experience

Question 11

what is the pure premium method formula ?

Answer 11

(incurred losses + LAE) / # of exposures

Question 12

what is loss ratio method ?

Answer 12

modifies existing rates by comparing the actual loss ratio to the expected loss ratio

Question 13

what is the formula for the loss ratio method?

Answer 13

(incurred losses + LAE) / Earned Premium

Question 14

what is merit rating?

Answer 14

rates are adjusted upward or downward based on experience

Question 15

what are the three types of merit rating?

Answer 15

-schedule
-experience
-retrospective

Question 16

what is judgment method?

Answer 16

rates are determined by the judgment of the underwriter (when data is limited)

Question 17

what are the two insurer financial statements?

Answer 17

balance sheet and income statements

Question 18

what is on a balance sheet?

Answer 18

assets, liabilities, policyholders surplus

Question 19

what are assets?

Answer 19

mostly financial investments vs real property and production equipment

Question 20

what are liabilities?

Answer 20

loss revenues and unearned premiums

Question 21

what are policyholders surplus?

Answer 21

total assets - total liabilities

Question 22

what is on an income statement?

Answer 22

revenues and expenses

Question 23

what is with revenues?

Answer 23

premiums and investment income

Question 24

what is with expenses?

Answer 24

claims and claims adjusting expenses
underwriting expenses
taxes
SG&A expenses including agent/broker commissions

Question 25

what are the key insurer performance ratios?

Answer 25

-loss ratio
-combined ratio
-overall operating ratio

Question 26

what is loss ratio?

Answer 26

ratio of incurred losses plus loss adjustment expenses to premiums earned

Question 27

what is combined ratio?

Answer 27

sum of loss ratio and expense ratio

Question 28

what is expense ratio?

Answer 28

the ratio of underwriting expenses to premiums written

Question 29

what is the formula for overall operating ratio?

Answer 29

combined ratio - investment income ratio