Chapter 9: Establishing the Price - Rating Factors Flashcards
What is MI and how does it help an insurer plan?
Management Information - data that the insurer can use to analyse trends and make forecasts about the future to assist in their planning
What are the 3 levels of decision making for a typical insurer?
- Board level
- Underwriting Managers
- Operational
What sort of information is reported on at board level?
Growth (gross and net written premiums, net of reinsurance)
Loss ratios
Underwriting profit
Mix of lines of business
Exposures (eg are they too exposed in a particular line of business/geographic area)
Return on capital (profit as a %age of capital)
Solvency
Competitiveness
Downside risk control (eg reinsurance)
What sort of information is reported on at underwriting managers level? How often in general?
Usually monthly
Growth by line of business Retention rates (how many renewals) How much new business is won Analysis of lost business Loss ratios Claims (trends, large losses, underlying claims, NatCat) Rate and premium increases Costs (commission and expenses) Areas of high exposure Competitiveness Reserving
What sort of information is reported on at an operational level? How often in general?
Usually monthly, sometimes weekly
Customer service New business and retention Rate increases Loss ratio Credit management Contract certainty
Why would an underwriter or underwriting manager need to analyse claims information?
To make predictions about future losses and set premiums accordingly to cover anticipated claims
What are the some of the things an underwriter will consider when analysing past claims data?
Are they increasing or decreasing? What are the causes? Are claims reserves accurate? Are there any large outliers? Are there any underlying claims? How are the claims reported on?
What is meant by the term personal injury discount rate? Explain how this is set and why it is used?
When a policyholder makes a claim for a significant personal injury, the settlement is adjusted based on the personal injury discount rate. This is set by the Lord Chancellor to take into account the amount the insured could reasonably expect to earn by investing the lump sum.
This is made because the purpose of insurance is to indemnify the policyholder - return them to the same financial position they were in before the loss. A lump sum payment would rarely need to be spent all at once, so the insured would earn interest on the majority of it. This would place them in a better financial position than they would otherwise have been. Therefore a deduction is made from the settlement to account for this
What is the current personal injury discount rate? What does this mean for insurers and insureds?
Minus 0.25%
It means that the costs of settling these types of claims are higher for insurers, and these costs may be passed on to consumers leading to higher premiums for policyholders
What two main factors are used in assessing risk?
Frequency and severity
How are frequency and severity usually related?
In general as severity goes up, frequency goes down
Why do insurers prefer high frequency, low severity risks?
Due to the law of large numbers and homogenous exposures they are easier to predict. They can also be excluded from claims by setting a suitable excess
What is meant by the term underlying claims cost?
Underlying claims are the high frequency, low severity, claims which are easier to predict and should be approximately proportional to the exposure. A certain percentage of the premium will be exposed to the underlying claims cost
Why do insurers not like low frequency, high severity, claims?
They are less predictable and much more serious, leading to high volatility
In what 3 scenarios may reinsurance apply?
Specific large losses
Large losses due to a single event effecting an accumulation of exposures
The accumulation of events over a specific period
