Insurance Terms Flashcards
Exposure
basic unit of risk that underlies the insurance premium
Written exposure
total exposures arising from policies issued during a specified period of time
Earned exposure
(as of a certain point in time) the portion of the written exposure for which coverage has already been provided
Unearned exposure
(as of that point in time) the portion of the written exposure for which coverage has not yet been provided
In-force exposures
number of insured units that are exposed to loss at a given point in time
Written premium
total premium associate with policies that were issued during a specified period
In-force premium
full-term premium for policies that are in effect at a given point in time
Estimated Ultimate Losses
Paid losses + case reserve + IBNR Reserve + IBNER Reserve
IBNER
aka development on known claims
ALAE
LAE that are directly attributable to a specific claim
Example of ALAE
Fees associated with outside legal counsel hired to defend a claim
Example of ULAE
salaries of claims department personnel
Characteristics of LAE
claim-related expenses
Underwriting expenses
aka. operational and administrative expenses. Non claim-related expenses in the acquisition and servicing of policies
4 Categories of underwriting expenses
- Commissions and brokerage
- Other acquisition
- General
- Taxes, licenses, and fees
Commission and brokerage expenses
Paid as a percentage of premium written
Other acquisition expenses
expenses other than commissions and brokerage expenses paid to acquire business
Example of “other acquisition”
Costs associated with media advertisements
General expenses
Remaining expenses associated with the insurance operations and any other miscellaneous costs
Example of “General expenses”
costs associated with the general upkeep of the home office
Taxes, licenses, and fees
include all taxes and miscellaneous fees paid by the insurer (excluding federal income taxes)
Underwriting profit
aka. operating income, the sum of the profits generated from the individual policies
Two main sources of profit for insurance companies
- Underwriting profit
2. Investment income
Investment income
income generated by investing funds held by the insurance company
Possible reasons for restatement of the historical experience
- Rate changes
- Operational changes
- Inflationary pressures
- Changes in the mix of business written
- Law change
frequency
number of claims / number of exposures
Pure premium
Losses / Number of Exposure = Frequency * Severity
Average premium
Premium / Number of Exposures
LAE ratio
LAE/Losses
UW expense ratio
UW expenses / Premium
UW expense ratio at the onset of the policy (e.g. commissions, other acquisition, taxes, licenses and fees)
UW expenses / written premium
UW expense ratio incurred throughout the policy (e.g. general expenses)
Measure of the portion of each premium dollar used to pay for underwriting expenses.
UW expenses / earned premium
OER (Operating Expense Ratio)
Measure of the portion of each premium dollar used to pay for loss adjustment and underwriting expenses.
UW Expense Ratio + LAE/Earned premium.
Combined ratio
Combination of loss and expense ratio.
Loss ratio + LAE/Earned Premium + Underwriting Expenses / Written Premium. the loss ratio does not include LAE.
Combined ratio in cases when the companies want to compare underwriting expenses throughout the policy
Loss Ratio + OER
What does Retention ratio measure
Measure of the rate at which existing inured renew their policies upon expiration). gauge the competitiveness of rates
Retention ratio
Number of policies renewed / number of potential renewal policies
What does close ratio measure?
aka. hit ratio, quote-to close ratio or conversion rate, measure of rate at which prospective insured accept a new business quote
Close ratio
Number of accepted quotes / Number of quotes
