D.1. Individual risk rating

Question 1

Why individual risk rating is more common in commercial lines

Answer 1

Exposure to loss varies from risk to risk
Classification plans are not refined (limited data)
Individual insureds can be large enough to have credibility

Question 2

ISO CGL Experience Rating Mod Formula

Answer 2

Mod = Z x (AER - EER) / EER
AER = Actual Experience Ratio
EER = Expected Experience Ratio (ultimate losses)

Question 3

ISO Actual Experience Ratio (AER) components

Answer 3

Numerator: actual basic limits losses and ALAE to date limited by MSL + expected development
Denominator: Expected ultimate basic limits losses and ALAE NOT limited by MSL

Question 4

ISO Expected Experience Ratio (EER) components

Answer 4

Numerator: Expected ultimate basic limits losses and ALAE limited by MSL
Denominator: Expected ultimate basic limits losses and ALAE NOT limited by MSL

If there is no MSL, then EER = 1

Question 5

Steps to calculate ISO CGL EMod

Answer 5

1. BLEL = ELR times annual premium
2. Detrend BLEL by year to get CSLC
3. Sum CSLC across all years and sublines
4. Expected development = CSLC for each year times EER times % unreported
5. Sum up expected developments
6. Cap each INDIVIDUAL loss at basic limits, then cap basic limits losses and ALAE by MSL. Sum the result.
7. Calculate Mod

Question 6

NCCI EMod formulas (2 ways)

Answer 6

Mod = [ZpAp + (1-Zp)Ep + ZeAe + (1-Ze)Ee] / (Ep + Ee)
Mod = [Ap + WAe + (1-W)Ee + B] / E + B

Zp = E / (E + B), Ze = WZp
Ep = Expected Primary Losses
Ae = Actual Excess Losses
W = weighting value
B = ballast value

Question 7

NCCI Experience Rating Expected Loss components calculations

Answer 7

Ei = Payroll/100 x ELRi
E = sum of Ei
Ep = sum of Di x Ei
Ee = E - Ep
Di = D-ratio (expected primary portion of expected total losses)

Question 8

When schedule rating can be used

Answer 8

To reflect individual risk characteristics not already reflected in rate calculation and not already captured in experience rating

Question 9

Steps to determine loss-rated composite rate

Answer 9

1. Calculate trended ultimate L+ALAE by coverage by year for each of the last 5 completed years of experience and sum
2. Select composite exposure base and measure exposures for each year (trend if inflation-sensitive)
3. Calculate adjusted premium using step 1 divided by given ELR
4. Calculate composite rate by dividing step 2 by step 3

Question 10

Unique considerations in pricing deductible policies

Answer 10

Claims handling (who is responsible for claims below deductible)
Application of deductible (losses only or including ALAE)
Deductible processing (cost to bill insured for deductible)
Risk margin (higher risk, higher profit margin)

Question 11

Retrospective rating main formulas

Answer 11

R = (b + CA)T
R = retro premium, C = loss conversion factor, A = reported loss, T is tax multiplier, b is basic premium

b = e - (C-1)E[A] + CI
e = total expenses
I = net insurance charge