D.1 Individual Risk Rating

Question 1

Why individual risk rating is more common in commercial lines

Answer 1

-Exposure to loss varies more from risk to risk -Classification plans are not as refined due to limited data -Individual insureds can be large enough to have credibility

Question 2

The ISO CGL Experience Rating Mod Formula

Answer 2

Mod = Z x (AER -

Question 3

ISO Actual Experience Ratio (AER) Components

Answer 3

Numerator: Actual basic limits losses and ALAE to date limited by the MSL + Expected Development Denominator: Expected ultimate basic limits losses and ALAE NOT limited by the MSL (also known as the Company Subject Loss Cost)

Question 4

ISO Expected Experience Ratio (EER) Components

Answer 4

Numerator: Expected ultimate basic limits losses and ALAE limited by the MSL Denominator: Expected ultimate basic limits losses and ALAE NOT limited by the MSL (also known as the Company Subject Loss Cost) If there is no MSL, then EER = 1

Question 5

Steps to calculate the ISO CGL Experience Mod

Answer 5

1. BLEL for each subline = Expected Loss Ratio times annual basic limits company premium for that subline. 2. Detrend the BLEL by year and subline to get CSLC values. 3. Sum the CSLC values across all years and sublines. 4. Expected Development for each subline and year = product of the CSLC for each year and subline of the experience period times the EER times the % unreported values. 5. Sum up the Expected Development values. 6. Cap each individual actual loss at basic limits, then cap basic limits losses + ALAE by the MSL. Sum the result. 7. Finally, calculate the Mod.

Question 6

NCCI Experience Mod Formulas - both ways

Answer 6

Mod = (ZpAp + (1 -

Question 7

NCCI Experience Rating Expected Loss Components calculations

Answer 7

Ei = (Payrolli/100) x ELRi E =sum Ei Ep = sum (Di x Ei ) Ee = E -

Question 8

When Schedule Rating can be used

Answer 8

To reflect individual risk characteristics that are not already reflected in the rate calculation and are not already captured in experience rating.

Question 9

Steps to determine loss-rated composite rate

Answer 9

1. Calculate trended ultimate loss and ALAE by coverage and year for each of the last 5 completed years of experience,and sum the result. 2. Select a composite exposure base and measure exposures using this exposure base for each year. If inflation-sensitive, trend the exposures. Sum the (possibly trended) exposures across all years. 3. Calculate Adjusted Premium using the result from step 1 (total trended ultimate losses and ALAE for the 5 years of experience) divided by a given Expected Loss & ALAE Ratio. 4. Calculate the Composite Rate by dividing Adjusted Premium by the total exposures from step 2.

Question 10

Unique considerations in pricing deductible policies

Answer 10

-Claims handling: Who is responsible for adjusting claims below the deductible? -Application of the deductible: Losses only or to losses and ALAE? -Deductible processing: If the insurer pays all losses first and then seeks reimbursement from the insured for losses below the deductible, there will be an extra cost for the insurer to bill and process these amounts. In addition, credit risk may also exist in case the insured is unable to pay for these amounts. -Risk margin: Losses above the deductible are very difficult to estimate, so the profit margin may be increased to reflect the higher level of risk that the insurer is taking in writing the policy.

Question 11

Retrospective rating main formulas

Answer 11