Chapter 7 Flashcards
what are the components of gross rate?
-prospective loss costs (pure premium)
-expense provision (load)
-margin for profit and contingencies (risk charge)
what is prospective loss costs?
amount needed to pay future claims and loss adjustment expenses
what is expense provision (“Load”)?
amount needed to pay expenses (acquisitions costs, overhead, premium taxes)
what is margin for profit and contingencies (“risk charge”)?
amount needed to protect against the possibility that actual claims and expenses exceed projections
what are loss adjustment expenses (LAE)?
expenses associated with adjusting claims
what is an exposure unit?
unit of measurement used in pricing (car-years, per $1000 in limits, etc)
what is the formula for gross premium?
gross rate * number of exposure units
what are the property and casualty ratemaking methods?
-class manual rating
-merit rating
-judgment method
what methods are under class manual rating?
-pure premium method
-loss ratio method
what is pure premium method?
rates developed based on past experience
what is the pure premium method formula ?
(incurred losses + LAE) / # of exposures
what is loss ratio method ?
modifies existing rates by comparing the actual loss ratio to the expected loss ratio
what is the formula for the loss ratio method?
(incurred losses + LAE) / Earned Premium
what is merit rating?
rates are adjusted upward or downward based on experience
what are the three types of merit rating?
-schedule
-experience
-retrospective
what is judgment method?
rates are determined by the judgment of the underwriter (when data is limited)
what are the two insurer financial statements?
balance sheet and income statements
what is on a balance sheet?
assets, liabilities, policyholders surplus
what are assets?
mostly financial investments vs real property and production equipment
what are liabilities?
loss revenues and unearned premiums
what are policyholders surplus?
total assets - total liabilities
what is on an income statement?
revenues and expenses
what is with revenues?
premiums and investment income
what is with expenses?
claims and claims adjusting expenses
underwriting expenses
taxes
SG&A expenses including agent/broker commissions
what are the key insurer performance ratios?
-loss ratio
-combined ratio
-overall operating ratio
what is loss ratio?
ratio of incurred losses plus loss adjustment expenses to premiums earned
what is combined ratio?
sum of loss ratio and expense ratio
what is expense ratio?
the ratio of underwriting expenses to premiums written
what is the formula for overall operating ratio?
combined ratio - investment income ratio
