individual risk rating Flashcards
why are some commercial lines insured are priced based on their individual loss experience
because exposure to loss varies sign. from risk to risk,
classification plans are not refined due to limited data,
individual insureds are large enough such that own experience has some credibility in predicting future experience
experience rating
- use an insured’s claims history on prior policy terms in determining current policy premium
- actual experience is credibility weighted with expected loss to produce modification factor that is applied to manual premium
- sometimes actual and expected losses are split into primary & excess
- primary component is intended to reflect freq of claims
- excess component is intended to reflect severity of claims
ISO GCL experience rating plan
NCCI experience rating plan
d-ratios
Schedule Rating
- pricing mechanism that allows UWers to subjectively adjust prem for individual insureds based on risk characteristics that are otherwise not reflected in prem calc
- important to avoid reflect any risk char that are already fully reflected in experience rating
ISO composite rating plan for Loss-rated risks
-rating a policy with multiple coverages using single exposure based instead of rating each coverage with separate exposure base
Composite rate is determined by:
- calc trended ult loss and ALAE by coverage
- select EB that will be used to price policy and measure exposures
- calc adjusted prem = trended ult loss/given ELR
- calc composite rate = adj PP/total exposures
- policy pays deposit premium at inception = composite rate*estimated exposures
- premium audit is done to determine actual composite exposures and final prem is determined
large deductilve policies
- claims handling: insurer or insured responsible for adjusting claims below deductible -> if insured less incentive to keep loss below D
- application of deductible: losses or L&ALAE
- deductible processing: is insurer paying all losses upfront and then seek reimbursement from insured for losses below deductible -> extra cost for billing and processing
- risk margin: loss above D are hard to estimate so profit margin may be increased to reflect higher level of risk in writing the policy
- premium for these policies are determined using standard PP formula
- loss portion of numerator will only include loss above D
- new fixed expenses for deductible processing and credit risk charge
retroscpective rating
- use insured’s loss experience during current policy term in determining current policy prem
- initial prem is collected at start of policy term
- adjustments to prem based on reported loss experience starting around 6 months after policy expires and every 12 months thereafter as losses develop
- may take many years for policy prem is finalized
NCCI retrospective rating plan
R=(b+CA)T
- b is basic prem and it covers profit, charge for having max and min prem (net insurance charge), all non-LAE expenses minus taxes
- A is reported loss (can include ALAE)
- C is LCF which is 1+expected LAE/Loss; if A has ALAE then this only includes ULAE
- T is TM which covers prem taxes and any other assessments and fees
if retrospective rating plan is balanced
b=e-(C-1)*E[A]*CI
- e is total expenses include LAE and profit but excl taxes
- I is net insurance charge for max and min premiums
- CI can be called net insurance charge too so state your assumption
- if per occurrence limit then replace A with actual losses capped -> do not change E[A] but rather replace I with net insurance charge that includes charge for occurrence limit
standard premium
std prem = manual prem*exp mod factor*schedule mod factor
Regulatory constraints
- limiting amount of RC
- requiring written notices to insured receiving large RCs
- prohibiting RVs
- prescribing certain RM tech
- revising RM assumptions
what can companies do for regulatory constraints
take legal action, revise UW guidelines to limit business @ inadequate rates, revise marketing to limit business @ inadequate rates, use proxy variables
Factors that influence insured’s purchasing decision
- competitor’s prices
- overall cost of product
- RCs
- insured characteristics
- customer satisfaction and brand loyalty
