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RMI 640 > Lecture (2nd half) > Flashcards

Lecture (2nd half) Flashcards

1
Q

goals/purpose of actuaries

A

put a price on risk

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2
Q

how do actuaries accomplish this goal

A
  • set rates
  • how much do we need to reserve
  • how do we develop these reserves
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3
Q

why price risk?

A
  • estimate future cash flows so assets are available
  • analyze reinsurance needs
  • monitor solvency
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4
Q

what makes a good rate?

A
  • reflects difference in risk exposures
  • stable
  • responsive
  • provide for contingencies
  • promotes risk control (good economy, higher interest rate)
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5
Q

collecting data

A
  • comes from financial statements

- but they don’t always sync up with policies

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6
Q

policy year method

A

-contains all data on all policies issued in a 12-month window

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7
Q

problem with policy year method

A

not sold on same date; you’ll end up needing 2 full years of data

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8
Q

advantages of policy year method

A
  • very accurately tied to policy specific losses

- really the only way to directly match losses, premiums, and exposure units

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9
Q

disadvantages of policy year method

A
  • 2 years (huge time lag) can’t change things as quickly
  • then might change rates for something that happened 3 years ago!
  • intensive, expenses add up
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10
Q

calendar year method

A
  • losses incurred, premiums written in that year (use accounting formulas to estimate)
  • need to predict earned premiums and losses
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11
Q

how to estimate earned premiums

A
  1. look @ unearned from past year
  2. add premiums written this year
  3. subtract unearned @ end of year
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12
Q

how to estimate losses

A
  1. look at losses paid @ beginning of year
  2. add loss reserves @ end of year
  3. subtract loss reserves @ beginning of next year
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13
Q

advantages of calendar year method

A

-easier, readily available to adjust rates

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14
Q

disadvantages

A
  • not tied to individual policies

- estimates- what happens if there are changes? can effect accuracy?

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15
Q

accident year method

A
  • compromise
  • earned premiums = same as calendar year method
  • incurred losses = all claims arising from insured events (accidents) during the period
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16
Q

advantages of accident year method

A
  • easy to gather

- losses more accurate than calendar year method

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17
Q

disadvantages of accident year method

A

still not directly tied to specific policyholders

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18
Q

adjust data

A
  • adjusted overtime (look in depth at data)

- notice patterns in lines of business, regions, underwriters, offices, etc.

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19
Q

types of loss reserves

A
  • case reserves
  • bulk/aggregate reserves
    - IBNER
    - IBNR
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20
Q

case reserves

A

estimated loss value of each individual claim

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21
Q

IBNR

A
  • incurred but not reported
  • might’ve happened but they haven’t called yet (might not realize there’s a loss yet, natural disasters on the way, etc.)
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22
Q

IBNER

A
  • incurred but not enough recorded

- case reserves exist but aren’t sufficient

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23
Q

overestimates of inaccurate reserves

A
  • tying up too much capital that could be used somewhere else, and leads to higher than needed premiums (cause you to lose market share)
  • potential issues with tax authorities (premiums are tax deductible- reserves count as reserved loss so they’re also tax deductible)
  • doesn’t maximize benefit to shareholders
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24
Q

underestimation

A
  • threatens ability to pay claims in future (solvency concerns)
  • shareholders may be receiving dividend payments when they should be going to notify reserves
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25
Q

why not over reserve?

A

not efficiently using capital, leads to higher than needed premiums. lack of sufficient ROI, potential issues with tax authorities

26
Q

underestimation problems

A
  • shareholders getting dividends when they should be going to fortify reserves
  • may be deemed impaired
  • solvency concerns
27
Q

loss estimation methods to create ultimate estimates

A
  • expected loss method (lazy)
  • chain ladder method (most common)
  • taylor separation method (a lot of math)
28
Q

ultimate estimates

A
  • thing they eventually become

- at the end when all claims are closed, what you pay (actuarial prediction)

29
Q

chain ladder method

A

factors in historical experience - create link ratios

30
Q

reserve adjustments

A

how much more you need to reserve based on policies written

31
Q

margin of error

A

compare projection with what actually happened

32
Q

benefits of chain ladder

A
  • easy to use/adjust

- great for low volatility lines

33
Q

issues with chain ladder

A
  • does not handle volatility well
  • if shift in market up (under reserved)
  • if market shift down (over reserved)
  • inflation?
34
Q

goal/purpose of reinsurance

A
  • frees up capacity so you can write more policies
  • allows you to loosen up UW restrictions a bit (increase large-line capacity)
  • expanding to new mkts/lines (UW expertise)
  • catastrophe protection
  • stabilize loss experience
  • facilitate withdrawal from mkt segment (runoff)
35
Q

runoff

A

out of line but still responsible for potential losses (withdrawal from mkt)

36
Q

cessation

A

primary insurer risk transfer to reinsurer

37
Q

reinsurance premium

A

primary pays this to reinsurer

38
Q

ceding commission

A

reinsurer pays primary insurer for all the work done upfront to acquire all the customers (usually a % of premium)

39
Q

retrocession

A

reinsurer purchase of insurance

40
Q

increase capacity

A

allows primary insurer to accept more significant risks than its financial condition and/or regulations would otherwise permit

41
Q

catastrophe protection

A

w/o reinsurance people wouldn’t sell policies b/c too great of loss (can cover part of each policy or X amt of coverage for total losses for peril over Y dollars)

42
Q

stabilize loss experience

A
  • Theory that volatility in losses can cause greater volatility in a stock price than a steady flow of profits
  • Reinsurance can help smooth out peaks and valleys
43
Q

surplus relief

A
  • insurers that are growing rapidly have difficulty maintaining a suitable surplus capacity
  • Provided by Ceding CommissionLiquid capital inflow helps offset some of the expenses booked for the policy
  • Help stay under 3:1 ratio (written premium to surplus)
44
Q

facilitate withdrawal from a market

A
  • stop writing new policies (but runoff) OR
  • cancel what you can and refund unearned premiums (usually another fee-costly) OR
  • withdrawal from the mkt segment by purchasing portfolio reinsurance
45
Q

portfolio reinsurance

A

transfers an entire type of insurance territory, or book of bidness

46
Q

treaty reinsurance

A
  • automatic

- quote/surplus share

47
Q

facultative reinsurance

A

negotiated

48
Q

quota reinsurance

A
  • pro rata

- primary and reinsurer share amounts of insurance premiums, and losses (including loss adjustment expenses)

49
Q

quota reinsurance ex ($250k reinsurance limit, 75% cessation, $150k policy, $1,500 premium, $60k losses)

A

policy: $37,500 retained, $112,500 ceded
premium: $375 retained, $1,125 ceded
losses: $15k retained, $45k ceded

50
Q

ceding commission appears as

A

liquid asset on your book; booked immediately to free up capital

51
Q

Problem with quota reinsurance?

A

Generally applies, regardless of the size of loss

52
Q

Solution to the problem with quota reinsurance?

A
  • Variable Quota Share Treaty

- Adjusts % payout based on size of loss

53
Q

Alternative to quota reinsurance?

A

Surplus Share Treaty

54
Q

surplus share reinsurance

A

basically need a deductible on treaty policy (you want the %s to scale with the size of the policy)

55
Q

ex of surplus share reinsurance ($50k line)

A
  • any policy less than this, fully retained by primary insurer (policy NOT losses)
  • any policy written over this, reinsurer takes the surplus
  • losses, premiums, and expenses are kept by primary vs. insurer based on the % that they accept the risk )
  • is $250k policy is written, primary keeps 20% of all losses, premiums, and expenses (reinsurer gets 80%)
56
Q

excess loss

A

straight forward, nominal amount trigger, called the attachment point

  • primary insurer covers up to an attachment point, anything in excess, up to limit, reinsurer covers
  • generally no ceding commission
  • often stacked btw multiple reinsurers
57
Q

ex of excess loss ($250k attachment point, $500k reinsurance purchased)

A
  • primary covers up to $250k

- reinsurer covers $250k-$750k

58
Q

working cover

A

type of XS loss coverage

  • attachment point in reachable range
  • not totally certain on quality of risk (new line, newer market)
59
Q

per risk

A

type of XS loss coverage

  • typically property
  • attachment points/limits apply to each loss event occurring to a specific exposure
60
Q

CAT XS loss

A
  • protect against specific high severity perils

- attachment point and limit apply to losses arising from a single CAT event

61
Q

why can reinsurers take on more risk?

A
  • they’re global: more ability to diversify (pooling)

- more capital bc money floods there from investors

62
Q

aggregate XS loss

A
  • good when worried about correlation

- can attach to not just a nominal event, but once a certain loss ratio is exceeded

RMI 640 (7 decks)

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