errata

Question 1

2 step trending

Answer 1

current trend factor = latest avg WP @ curr/hist avg EP @ curr

2012 trended OLEP = 2012 EP @ curr*current trend factor*prospective TF

=(2012 EE * 2012 avg EP @ curr)*current trend factor*prospective TF

=2012 EE*latest avg WP @ curr*prospective TF

**prospective TF is WD to WD

Question 2

loss costs

Answer 2

loss & LAE

no UW exp, profit, variable expenses, fixed expenses

just costs due to losses

Question 3

company change using ind LC change from industry

and proposed deviation

Answer 3

company change = proposed dev/current dev * (1+ind LC change from industry)

proposed dev = (expected LC diff+1)/(1-V-Q)

Question 4

fixed expense trend with indices

Answer 4

fixed exp trend = %*ECI + (1-%)*CPI

employee cost index

consumer price index

Question 5

APPA: why is 1st iteration higher than convergence value

Answer 5

disproportionate exposure is concentrated i higher and lower cost areas

*iterative method is ued to adjust for unequal distributions of underlying exposures

Question 6

calculating new base rates and new relativities using LRA

Answer 6

calc credibility weighted change factors

calc new base rate = inforce base*cred weighted change factor/credibility weighted change for total

***total factor is weighted using inforce premium

new relativities = new base rate/BL new base rate

Question 7

ISO experience rating: CSCL and expected development

Answer 7

CSLC = BL prem * ELR * detrend

expected dev = CSLC * %unrptd * EER

Question 8

nonmodeled CAT PP calculation

Answer 8

need all yr avg for CAT-to-AIY ratio

need to load for ULAE

need to multiply this by AOI/exposure that corresponds with future avg ED

**if avg ED =1/1/16 then equal weight for CY 2015 & 2016

nonmodeled CAT = avg AIY/exposure*non-modeled CAT prov/AIY

Question 9

why is using AIY useful for nonmodeled CAT PP

Answer 9

using AIY is simple way to adjust ratio for inflation

if PP was based on non-modeled/house years, ratio would increase over time due to inflation

Question 10

residual indication and net trend and trended present rates indication

Answer 10

residual indication =(1+latest ind RC)/(1+last RC taken) -1

net trend = (1+proj loss trend)/(1+proj prem trend)-1

trended present rates indication = (1+residual)(1+net trend)^period-1

Question 11

trending: why adjust for one-time changes

Answer 11

using prem @ historical rate levels is inappropriate when selecting trends since one time changes would be picked up by trend even though we don’t expet these to continue in future

Question 12

overfitting

Answer 12

estimates reflect noise in addition to true signal

will replicate historical data well but less reliable for future data

Question 13

why is PY the best match of loss and exposure?

Answer 13

provides the best match between premiums and losses since the losses come from the same policies from which premium is earned

Question 14

PY, CY, AY losses

Answer 14

PY: Losses are summarized by the years the policies containing those losses were written.

CY: Losses are summarized for loss transactions occurring during the CY.

AY: Losses are summarized by the years in which the losses occurred.

Question 15

adverse selection

Answer 15

Adverse selection occurs when an insurer doesn’t use a risk characteristic that is being used by other insurers. Since other insurers will attract the lower risk insureds based on this risk characteristic, the insurer not using the risk characteristic will be left with a higher than proportional share of the higher risks, for which it does not accurately price or underwrite. As such, the insurer will have a higher loss ratio.

Question 16

skimming the cream

Answer 16

Skimming the cream occurs when an insurer uses a risk characteristic in underwriting or marketing to attract lower cost risks without lowering the price. Since it is not lowering the price for these risks, the insurer will have a lower loss ratio.

Question 17

RY diagram for CMP and OP

OP: A

CMP: B, C, D, E

Answer 17

Question 18

credit vs. indicated relativity for deductibles

Answer 18

credit = LER

indicated relativity = 1- LER

LER = loss below d/ground up loss

Question 19

asset share pricing vs traditional RM techniques

Answer 19

Traditional ratemaking techniques only consider the experience of a single period of time. As such, they fail to consider differences in persistency between risks. Persistency can have a significant impact due to loss and expense differences between new and renewal business. The asset share pricing model accounts for this by introducing multiple periods, persistency, and different assumptions for new and renewal business.

Question 20

why would insurer and insured perfer retrospective rating

Answer 20

Retrospective rating reduces the pricing risk of the insurer, so an underwriter may only accept a questionable risk if it is retrospectively rated.

If an insured expects to have very favorable loss experience, then it can save on premium by choosing retrospective rating.

Question 21

questions to ask UW r to help identify the source of the change in the loss data

Answer 21

Have there been any changes in underwriting guidelines in an effort to grow the business? Have we been writing higher policy limits or lower deductibles?

Question 22

off-balance factors

Answer 22

1. relativity change factor for BL
2. avg current relativity/avg proposed relativity

*if using premium for weighting, need OLP @ base = prem/(curr rell)

3. 1/avg rel change factor

*if using prem, use OLP

Question 23

asset share pricing: calculating profit

Answer 23

need PV of profit and PV of prem to calculate profit as proportion of prem

***need to use cumulative persistency

Question 24

capping RC: 2 practical issues and 1 reason why insurer would cap

Answer 24

Capping rate changes on some insureds may lead to the total rate change being different than the targeted rate change of 6%. In that case, the rates may be inadequate (or excessive).

The capping rule would need to be programmed into the insurer’s computer systems, which can get quite complicated

may implement the rule to try and prevent policyholders that would otherwise receive a larger rate increase from shopping for insurance with other insurers. The insurer would be trying to maximize policyholder retention.

Question 25

C/O Dev factor calculates what estimate

Answer 25

C/O Dev factor * C/O = Unpaid claims

Question 26

expected emergence calculations

Answer 26

(Ult-cumulative rptd)/(1-%rptd) * (%rptd@t+1 - %rptd@t)

=(current IBNR)*portion of IBNR expected to emerge

-preserves current IBNR when calc expected development -> if you let t+1 be ultimate, you get back current IBNR

cumulative rptd * (LDF t to t+1 -1)

Ult * (%rptd@t+1 - %rptd@t)

• the last 2 methods would result in different total IBNR if you let t+1 be ultimate
• all 3 will be equal if ultimate claims were determined on cumulative reported claims and selected development pattern

Question 27

Kittel: how to

Answer 27

Need to calc Incurred claims and avg paid&incd for each CY

incd = paid+change(case)+change(IBNER)

then calc ratio of ULAE to avg paid & incd = W*

estimate unpaid ULAE = W* (pure IBNR+50%*case)

*if CMP, can assume IBNR is IBNER and not pure IBNR

*Kittel recognizes that ULAE is incurred as claims are reported even if no claims payments have been made -> more accurate for growing/shrinking