Chapter 7: Actuarial Operations Flashcards
1
Q
Actuarial Functions
A
- Ratemaking
- Estimation of unpaid liabilities and adequacy of loss reserves
2
Q
Ideal Characteristics of Rates
A
- Be stable
- Be responsive
- Provide for contingencies
- Promote risk control
- Reflect differences in risk exposure
3
Q
Rate Components
A
- An amount needed to pay for future claims and loss adjustment expenses (prospective loss costs)
- An amount needed to pay future expenses; such as acquisition expenses, overhead, and premium taxes (expense provision)
- An amount for profit and contingencies (profit and contingencies factor)
4
Q
Factors That Affect Ratemaking
A
- Estimation of losses
- Delays in data collection
- Change in the costs of claims
- Insurer’s projected expenses
- Target level of profit and contingencies
5
Q
Estimation of Losses
A
Paid Losses + Loss Reserves = Incurred Losses
6
Q
Delays in Data Collection and Use
A
- Delays by insured in reporting losses to insurers
- Time required to analyze data and prepare a rate filing
- Delays in obtaining state approval of filed rates
- Time required to implement new rates
- Time period during which rates are in effect, usually a full-year
7
Q
Ratemaking Methods
A
- Pure premium method
- Loss ratio method
- Judgement method
8
Q
Pure Premium Ratemaking Method
A
- ) Calculate the pure premium
- ) Estimate expenses per exposure unit based on the insurer’s last experience
- ) Determine the profit and contingencies factor
- ) Add pure premium and the expense provisions and divide by one minus the profit and contingencies factor
9
Q
Ratemaking Process Overview
A
- ) Collect data
- ) Adjust data
- ) Calculate overall indicated rate change
- ) Determine territorial and class relativities
- ) Prepare rate filings and submit to regulatory authorities as required
10
Q
Collect Data
A
Three General Categories:
- Losses, both paid and incurred
- Earned premiums and/or exposure Information
- Expenses, including a profit and contingencies factor
11
Q
Adjust Data
A
- Adjust premium to current rate level
- Adjust historic experience for future development
- Apply trending to losses and premium
12
Q
Ratemaking Factor Variance for Different Types of Insurance
A
- Experience period
- Trending
- Large loss limitations
- Credibility
- Increased limits factors
13
Q
Experience Period
A
Factors in determining the appropriate experience period:
- Legal requirements (if any)
- The variability of losses over time
- The credibility of the resulting ratemaking data
14
Q
Types of Loss Reserves
A
- Case reserves
- Amounts that represent the estimated loss value of each individual claim
- Bulk reserves
- General provision for additional reserves, since the insurer cannot identify specific claims with inadequate or excessive case reserves or predict which claims reopen
15
Q
Bulk Reserves
A
Bulk Reserves can have three components:
- Incurred but not reported (IBNR) Reserves
- Reserves for losses that have been reported but for which the established case reserves are inadequate (IBNER- incurred but not enough reserves)
- Reserves for claims that have been settled and the reopened
16
Q
Analysis of Loss Reserves
A
The most common methods used estimate ultimate losses are:
- Expected loss ratio method
- Loss development method
- Bornhuetter-Ferguson method
17
Q
The Loss Development Method
A
- ) Compile the experience into a loss development triangle
- ) Calculate the age-to-age development factors
- ) Select the development factors to be used
- ) Apply factors to experience to make projections
