Chp 7: Ratemaking Flashcards
What rating factors are commonly used in the process of ratemaking? (8)
- Age, Gender, and Marital status
- Driving Experience
- Driving Record
- Other regular drivers
- Territory and distance driven annually
- Vehicle usage
- Vehicle description
- Coverage
Age, Gender and Marital status of applicant
Historically have been used as rating factors but pressure has been growing to using them because they are considered unfair and discriminatory.
However, statistics indicate a definite relationship between these factors and loss frequency. Examples include:
-Single male drivers under 25 traditionally have worst driver records, but once they are married, it tempers their driving habits because they have to worry about others well being
-Young women historically have better driving records
Can be discriminatory as good drivers may be charged higher premiums as a result of the class of individuals they are catogorized with
Driving experience
Is the number of years a driver has been licensed. Usually newly licensed drivers are allowed credit for 3 years driving experience if they show that they have completed an approved driver training course.
Driving record
Measures how many accidents and traffic violations (of any kind except parking) the applicant has had.
Includes any driving convictions in the past 3 years and any suspensions during the past 6 years
Other regular drivers
Similar details as described above are required of other drivers who regularly use the vehicle, as is the percentage of use by each person per vehicle
Territory and Distance driven annually
Regularity and distance driven affect the extent to which a vehicle is exposed to loss. The more it is on the road, the greater its chance of being involved in an accident.
Where the automobile is driven also has an impact on the number and types of accidents, or losses it is exposed to thus affecting the rates
Give examples of different types of loss exposures in different parts of the country. (8)
- In congested urban areas - tend to be more rear end collisions and fender benders, but are less likely to be totalled
- Long distance highway driving more likely to result in accidents at high speed or multiple vehicle pile ups with severe injuries, deaths, and heavy damage or total loss to vehicle
- Driving on country roads may result in single vehicle accidents because of speed, poor road conditions, and visibility
- Gravel areas are hard on windshields and lights
- Some areas are more prone to summer hailstorms which can damage cars (Alberta)
- Pedestrian accidents more common in congested areas
- Vehicle fire more common in remote areas
- Vehicle theft more common in congested areas, as it is easier to steal when your by a heavily populated area and where you can get lost in a crown
Vehicle Usage
Is the vehicle used for business purposes or personal use?
Exposures can very when cars are used for different purposes. Some purposes require the car to be on the road more, or to be used in more hazardous areas, or to be driven by multiple drivers
Vehicle description
includes the year, make, model, and serial number of the vehicle (VIN)
Many newer models have safety technology systems which can reduce the likelihood of collisions, resulting in lower premiums.
Where as other models are known to be more susceptible to certain types of damage as a result of their construction, therefore higher rates are charged
Coverage
When insureds request more extensive coverage, higher premium will be charged, less coverage = less premium
If insured requests lower deductible, the premium will be higher than if insured requests higher deductible.
Statistical and Actuarial rating- What is the law of large numbers and how does it relate to rating?
The mathematical premise that states that the degree of uncertainty is reduced as the number of events increases
The law of large numbers can be applied to individual risks by keeping statistical loss records on a large number of such risks
What are the components of an automobile insurance rate? (2)
1) Pure premium- Portion of the total premium that is needed to pay the expected losses
2) Expense loading - the part of the premium rate that represents the costs to the insurer of producing and maintaining the policy. It is added to the pure premium.
What is included in the expense loading costs? (5)
- Acquisition costs- costs of putting business on the books and acquiring premium (Includes commission and cost of insurers sales structure)
- Processing and servicing costs (Administration)
- Insurance premium taxes
- Contingencies (Catastrophes, extra large losses, and reinsurance costs)
- Profit
Statistical body and data collection
All private insurers who write business in Canada must record and file automobile experience data to comply with the requirements of the automobile statistical plans prescribed by the superintendents of insurance.
The General Insurance Statistical Agency (GISA) acts as the statistical agent on behalf of Alb, NB, NL, NS, Ont, PEI, Yukon, NT, NWT
In Quebec, the Groupement des assureurs automobiles (GAA) is the appointed statistical agent
GISA prepares exhibits for the Automobile statistical plan (ASP)
What is the Automobile Statistical Plan (ASP)? And what information do the exhibits present?
- A collection of statistical information that all automobile insurers who write business in Canada must record and file as prescribed by the superintendent of insurance. Commonly known as the green book.
The exhibits present historical insurance statistics for the following classes of vehicles:
-Individually rated (individually rated vehicle not on fleet policy)
-Fleet rated on per vehicle bases
-Fleet rated on a bulk basis
-Miscellaneous (policies other than fleet or individual)
-Private passenger vehicles
-Commercial vehicles
-Public automobiles (ambulances, public buses, taxis, etc)
-Garages, manufacturers, and auto dealers
-Other personal use vehicles (Motorcycles, ATV’s, etc) - Driver policies and NOA insurance policies
What are loss costs? and what are the components of loss costs?
The proportion of the insurance rate that covers the costs of claims.
Include the following:
-Paid losses: amount actually payed in losses during specified period of time
-Outstanding losses: Losses incurred but not yet paid
-Incurred but not yet reported losses(IBNR): liability for future payments on losses that have occurred but not have not yet been reported to the insurer
What are incurred losses?
The total amount of paid claims and loss reserves associated with a particular period of time.
The formula is losses incurred during the period + outstanding losses at the end of the period - outstanding losses at the beginning of the period.
Does not ordinarily include IBNR losses
Actual loss ratio and pure premiums exhibit
The automobile statistical plan shows actual loss ratio exhibits, which are a ratio of the loss costs to earned premiums (this is known as the earned loss ratio), and pure premium exhibits.
What is trending?
In addition to loss cost development, an actuary must forecast the trend of increase or decrease in loss costs for which the premiums are calculated.
Loss cost development and trending are sometimes combined because together they impact future losses, this
Current lost costs X development trend factor = projected loss costs
Actuary
one who specializes in the mathematics of insurance, mortality rates, and the like
Use of base rates, relativities, and differentials
Because of the tremendous amount of data developed, relativities are extracted from loss costs, and the resulting differential is applied to the base future rate to provide the premium.
See example on pg 7-10
Vehicle rate groups
A rate group is a numerical value assigned to a vehicle based on its expected claims costs. The value assigned is based on number of factors including:
- Body style
- Horsepower
- costs of repairs
- frequency and cost of actual claims
- vehicle price
The higher the expected claims costs, the higher the rate group will be, and the higher the premium will be charged
What is the Canadian Loss Experience Automobile Rating (CLEAR)?
A method for classifying different models of cars for insurance purposes by using historical claims data, including collision, comprehensive, DCPD, and accident benefits.
Under CLEAR, rate groups are now calculated using data provided by IBC, ICBC, MPI, SGI, SAAQ, and GAA, on the costs of claims relative to such factors as wheelbase, body style, weight to horsepower ratio, price, and theft record of individual models.
Other factors, Final premiums and Investment income
Other factors- insurers have their own statistical data that the use to fine tune their rates, and to justify their rates to the rating board
Final premiums- Expense loading’s are added to the projected loss costs. Actuarially calculated premiums may be reviewed by senior management and adjusted for the market and competition, and for political reasons
Investment income- Is the money earned from premiums and on loss reserves. The insurers use of investment income to modify premiums is subject to close scrutiny. All insurers invest the premium income they earn from policyholders and use the subsequent investment to keep auto insurance rates low and stable
What provinces have rating boards? and what are rating boards used for? (8)
Alberta British Columbia- the British Columbia Utilities Commission Manitoba - The public utilities board must approve changes New Brunswick Newfoundland and Labrador Nova Scotia Ontario Prince Edward Island
Is used to control automobile rates. British Columbia Utilities commission was approved in 2003 as the legislated authority to approve the basic rates in the province. ICBC controls optional rates but the BCUC does have some influence over operations of ICBC and can make recommendations on business practices.
Rating boards - differences
Some boards are set up under the direction of a public utilities board, where others are independent or associated with a superintendent of insurance.
Controls exercised also vary, can include any of the following
- Prior approval- companies file their proposed rates and must wait for approval before using them
- File and use- file proposed rates and use them as proposed, but may face enquires by the board
- File and use following an adjudication period- file proposed rates and the law allows a period of time such as 30 or 60 days, during which the board can challenge them. If rates remain unchallenged after the period, the company can use them as they will be considered approved
- Prior setting of rates by the board with variations from benchmark- board sets the rates and these are known as benchmark. Insurers can use the benchmark rates or vary them, based on a board approved percentage. If insurer wants to deviate the benchmark either up or down, a hearing is usually required
What is Usage Based Insurance?
UBI programs feature a telematics device that can be plugged into a vehicles diagnostics on board computer to track mileage and driving habits, a smartphone app that tracks driving habits, or a combination of both devices depending on the insurers mix of end use products and services.
Data is collected on the mileage and driving behaviours while the car is used, which can be used in combination with other rating factors to calculate the insurance premium for the car.
It is one of the fastest new product enhancements in insurance history. This growth represents a huge opportunity for insurers to grow and expand their market share, improve risk selection, enhance underwriting performance, increase retention rates, and combat adverse selection.
What is adverse selection?
Occurs when those with higher risks may purchase insurance in greater amounts than those with lower risks. Much of insurance law and practise is designed to control adverse selection. Insurers protect themselves from adverse selection by attempting to measure risk, and either charging more for higher risks, or refusing to cover them at all
What are the two options for UBI hardware?
1) Telematics dongles that plug into a vehicles diagnostic port to collect info directly from the vehicle and send the info directly to central servers
2) Smartphones - can now assess speed, acceleration, and deceleration, and are equipped with GPS. They can be used on their own to calculate driver score. While the data quality and quantity is more limited, this option is easy to use, less expensive, and dispenses with the logical costs of providing the driver with a plug in device
Differences between traditional Rating Versus UBI rating
See example on page 7-15
What are the benefits of Usage Based Insurance?
- Benefits of underwriting and rating far outweigh the costs associated with offering the service to drivers.
- Positive societal benefits emerge in terms of safer driving, slower driving (Change in driving habits)
- Potential environmental benefits such as reduced greenhouse gas emissions from slower, safer driving
- Fewer road casualties, and improved emergency response times to accidents
- Reduce insurance fraud
- Help give details of accident that occurred
