Insurance Expense Exhibit & Other Flashcards
Surplus Allocation to Specific LOB
Surplus for LOB(A), let m(x) = avg[CY(t), CY(t-1)]
Surplus Ratio = m(S) / denominator
- denominator = m(loss reserve + LAE reserve + UEPR) + CY NEP
Surplus LOB(A) = (Surplus Ratio) * (denominator for LOB A only)
Net Investment Gain Ratio (NIGR)
NIGR = Net Investment Gain (NIG) / Total Investable Assets (TIA)
TIA = m(loss/LAE/UEP reserve + ceded reinsure prem payable + S - agents’ balance)
Price Optimization
What is it and how it benefits insurers and financial stability
What is it
- the process of maximizing or minimizing a business metric (ex. PH retention, marketing goals)
- uses sophisticated tools and models to quantify business considerations
Benefits Insurers
- Does not unfairly discriminate (for ratebook optimization)
Financial Stability
- Provides more accurate pricing
CAS believes may increase the rate stability and lower insurer’s long term cost for providing coverable (less discriminatory to PHs)
- beneficial for customers who don’t wish to regularly shop around for insurance
- Consumer Federation of America disagrees
Benefits Related to UBI to Consumers/Insurers/Society
Consumers
- Availbility - insurer can price and manage risk more accurately –> may accept more risk and write more policies
- Affordability - UBI is better at identifying good drivers –> lower rates for good drivers
- Telematics can provide real time feedback to driving habits
- All drivers can improve driving habits and get lower rate
Insurers (help financial stability)
- Identify and retain low risk drivers and
- Identify high risk drivers and price more accurately (stability) or provide feedback so they can improve driving habit
Society
- Less discriminatory rating –> rates are based on how you drive rather than age, sex, marital
- Encourages less driving –> less accidents pollution, congestion/traffic
Low/High Scruntity Reasons
High Scruntity
- insurance is mandatory for PPA and HO (for mortgages)
- buyers are unsophisticated
- insurers have more credible data
Low Scruntity
- buyers are sophisticated, individualized risks
- thin (not credible data)
Receivership
3 actions
Process in which a legally appointed receiver acts as a custodian of insurer’s assets and operations (and has full discretion in managing insurer’s assets)
Conservation
- takes over operations of insurer
- conserve insurer’s assets for the benefit of policyholders, creditors and other interested parties
Rehabilitation
- reorganization of insurer’s finances so that debt obligations can at least be partially met with future earnings
Liquidation
- closure and distribution of assets to creditors in priority order
Mandatory Action Level & Administrative Supervision
Mandatory Action Level
- requires insurer to submit financial improvement plan
- requires reduction in liabilities and/or increase in capital
- place restrictions on new/renewal business
Administrative Supervision - regulator must give consent for:
- incur new debt
- issue new policies
- purchase reinsurance
Reinsurance Provision
Minimum reserve (calculated under SAP) that reflects the estimated uncollectible reinsurance recoveries
Quantitative Methods for Testing Risk Transfer
If Expected Reinsurer Deficit (ERD) > 1%, then there is a transfer of risk
- = Prob(NPV U/W loss to reinsurer) * NPV(U/W loss) / (Reinsurance Premium)
- = Prob(x) * Severity (x)
10-10 Rule
- Is the probablity that the reinsurer have a 10%+ UW loss ≥ 10%? If so, then there is a transfer of risk
- If reinsurer has ≥ 10% chance of ≥ 10% U/W loss, then there is a transfer of risk
ERD vs 10-10
ERD will correctly identify risk transfer when there is a small chance of catastrophic loss
- ERD takes into account a small chance of a large loss whereas 10-10 rule requires the probability of that event >10%
ERD considers the time value of money in the calculation
- more accurate assessment of the future cash flows as some payments can be many years in the future
ERD is more sophisticated - has more parameters built into the method
- can consider interest rates and payment patterns
Reasons for Commutation
Solvency: primary insurer and reinsurer may have concerns with each other’s solvency
- if reinsurer is weak, commutation eliminates credit risk for the insurer
- if insurer is weak, commutation provides immediate cash to the insurer and the reinsurer avoids future issues if insurer does go insolvent
Exit: provides a way for primary insurer and reinsurer to exit a particular market
Disputes: primary insurer and reinsurer want to end their relationship because of of dispute
- disputes over claim resolution or contract provisions
Reserves: primary insurer and reinsurer have a big difference in estimated reserves
- commutation will leave them both thinking they’re getting a good deal
Steps in Pricing a Commutation
Considerations
EDTU
- Estimate the claim payments that would be made in absence of a commutation
- Discounting the claim payment estimates
- the insurer and reinsurer would try to agree on a price that is mutually beneficial in tax benefits
- May be unique considerations (possibly qualitative) that affect the price in a unique situation (reinsurer may be desperate for whatever reason to exit to market and is okay accepting a higher commutation price)
Guaranty Fund Calculations
Formulas
Company liabilities eligible for guaranty fund (reimburse PH for unpaid loss and UEP)
- UEP + Reserves - Assets
Specific company amount to be assessed/paid for guaranty fund
- (Company’s WP) / (Total WP of Solvent Companies) * (UEP + Reserves - Assets)
Guaranty Fund Impact to Small Individual Insured, Insurer, Large Corporate Insureds
Small Individual Insureds / Large Corporate Insureds
- receive claim payment prompty (+)
- allows them to collect unearned premium (+)
- increased cost of insurance (-)
Insurer
- give PHs reassurance that they are protected if they go insolvent (+)
- insurers have to pay operating expenses for the fund (-)
Risk Retention Group (RRG) vs Traditional Insurers
Also what is RRG
RRG is a liability insurance company
- Members are a group of similar business
- Med malpractice is the most common LOB for RRG
Increase availability for insurance coverages like med mal by learning from other members and reducing risks
RRGs vs Traditional Insurers
- many RRGs use GAAP instead of SAP
- few RRGs submit rate filings
- RRGs cannot participate in state guaranty funds
