Establishing the price rating

Question 1

What are “Board level” decisions concerned with?

Answer 1

Broad strategy implementation.

For example:

• growth
• business mix: by class, distribution channels, geographically
• competitive positioning
• solvency

Question 2

What are “Manager level” decisions concerned with?

Answer 2

Detailed plans that implement the strategy agreed at board level.

Managers will be responsible for different divisions within the business, i.e. underwriting, sales, or personnel.

Question 3

What are “Operational level” decisions concerned with?

Answer 3

Day-to-day implementation of the practices and procedures established by the management team.

For example maintaining:

• Customer service levels
• Customer retention

Question 4

Name 5 important factors when studying claims data.

Answer 4

• Looking at each year chronologically, is the experience improving or deteriorating?
• Is the number of claims each year increasing or decreasing?
• What are the cause of claims?
• Are there any large claims that distorting the pattern (anomalies)?
• Are individual claims reserves accurate, given the nature of the claims?

Question 5

In what 2 ways is risk assessed in terms of?

Answer 5

• Frequency: how often a risk is likely to occur

- Severity: how financially worse off someone is if there is a loss.

Question 6

What does the Heinrich Triangle show?

Answer 6

High frequence, low severity pattern of industrial accidents.

For every 1 major injury at work, there are 30 minor ones, and 300 non-injury accidents.

UNDERWRITERS SHOULD BE ABLE TO PREDICT THESE LOSSES (referred to as underlying claims cost).

Question 7

What is the claims ratio formula?

Answer 7

Claims ratio = claims incurred / Premium * 100

Question 8

What is earned premium?

Answer 8

Earned premium is a reflection of how much premium is earned during the period cover.

If an insurer incepts cover on the 1 July and its financial year runs from 1 January until 31 December then it will only have 50% of the premium in the financial year in which the premium is entered onto the accounts (or is ‘booked’).

Question 9

What is an earned loss ratio?

Answer 9

Claims incurred / earned premium * 100.

Question 10

What are the 4 main types of monitoring period?

Answer 10

1. Policy year (individual policies)
2. Underwriting year (multiple policies grouped into ‘underwriting years’)
3. Calendar year (multiple policies allocated to a calendar year)
4. Accounting year (LEAST USEFUL METHOD)
   - dependant on financial year e.g. 01/10 - 30/09, rather than 01/01 - 31/12
   - prospective premium and claims developments from the accounting year end have to be estimated.