Lecture (2nd half) Flashcards
goals/purpose of actuaries
put a price on risk
how do actuaries accomplish this goal
- set rates
- how much do we need to reserve
- how do we develop these reserves
why price risk?
- estimate future cash flows so assets are available
- analyze reinsurance needs
- monitor solvency
what makes a good rate?
- reflects difference in risk exposures
- stable
- responsive
- provide for contingencies
- promotes risk control (good economy, higher interest rate)
collecting data
- comes from financial statements
- but they don’t always sync up with policies
policy year method
-contains all data on all policies issued in a 12-month window
problem with policy year method
not sold on same date; you’ll end up needing 2 full years of data
advantages of policy year method
- very accurately tied to policy specific losses
- really the only way to directly match losses, premiums, and exposure units
disadvantages of policy year method
- 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
calendar year method
- losses incurred, premiums written in that year (use accounting formulas to estimate)
- need to predict earned premiums and losses
how to estimate earned premiums
- look @ unearned from past year
- add premiums written this year
- subtract unearned @ end of year
how to estimate losses
- look at losses paid @ beginning of year
- add loss reserves @ end of year
- subtract loss reserves @ beginning of next year
advantages of calendar year method
-easier, readily available to adjust rates
disadvantages
- not tied to individual policies
- estimates- what happens if there are changes? can effect accuracy?
accident year method
- compromise
- earned premiums = same as calendar year method
- incurred losses = all claims arising from insured events (accidents) during the period
advantages of accident year method
- easy to gather
- losses more accurate than calendar year method
disadvantages of accident year method
still not directly tied to specific policyholders
adjust data
- adjusted overtime (look in depth at data)
- notice patterns in lines of business, regions, underwriters, offices, etc.
types of loss reserves
- case reserves
- bulk/aggregate reserves
- IBNER
- IBNR
case reserves
estimated loss value of each individual claim
IBNR
- 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.)
IBNER
- incurred but not enough recorded
- case reserves exist but aren’t sufficient
overestimates of inaccurate reserves
- 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
underestimation
- threatens ability to pay claims in future (solvency concerns)
- shareholders may be receiving dividend payments when they should be going to notify reserves
why not over reserve?
not efficiently using capital, leads to higher than needed premiums. lack of sufficient ROI, potential issues with tax authorities
underestimation problems
- shareholders getting dividends when they should be going to fortify reserves
- may be deemed impaired
- solvency concerns
loss estimation methods to create ultimate estimates
- expected loss method (lazy)
- chain ladder method (most common)
- taylor separation method (a lot of math)
ultimate estimates
- thing they eventually become
- at the end when all claims are closed, what you pay (actuarial prediction)
chain ladder method
factors in historical experience - create link ratios
reserve adjustments
how much more you need to reserve based on policies written
margin of error
compare projection with what actually happened
benefits of chain ladder
- easy to use/adjust
- great for low volatility lines
issues with chain ladder
- does not handle volatility well
- if shift in market up (under reserved)
- if market shift down (over reserved)
- inflation?
goal/purpose of reinsurance
- 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)
runoff
out of line but still responsible for potential losses (withdrawal from mkt)
cessation
primary insurer risk transfer to reinsurer
reinsurance premium
primary pays this to reinsurer
ceding commission
reinsurer pays primary insurer for all the work done upfront to acquire all the customers (usually a % of premium)
retrocession
reinsurer purchase of insurance
increase capacity
allows primary insurer to accept more significant risks than its financial condition and/or regulations would otherwise permit
catastrophe protection
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)
stabilize loss experience
- 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
surplus relief
- insurers that are growing rapidly have difficulty maintaining a suitable surplus capacity
- Provided by Ceding CommissionLiquid capital inflow helps offset some of the expenses booked for the policy
- Help stay under 3:1 ratio (written premium to surplus)
facilitate withdrawal from a market
- 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
portfolio reinsurance
transfers an entire type of insurance territory, or book of bidness
treaty reinsurance
- automatic
- quote/surplus share
facultative reinsurance
negotiated
quota reinsurance
- pro rata
- primary and reinsurer share amounts of insurance premiums, and losses (including loss adjustment expenses)
quota reinsurance ex ($250k reinsurance limit, 75% cessation, $150k policy, $1,500 premium, $60k losses)
policy: $37,500 retained, $112,500 ceded
premium: $375 retained, $1,125 ceded
losses: $15k retained, $45k ceded
ceding commission appears as
liquid asset on your book; booked immediately to free up capital
Problem with quota reinsurance?
Generally applies, regardless of the size of loss
Solution to the problem with quota reinsurance?
- Variable Quota Share Treaty
- Adjusts % payout based on size of loss
Alternative to quota reinsurance?
Surplus Share Treaty
surplus share reinsurance
basically need a deductible on treaty policy (you want the %s to scale with the size of the policy)
ex of surplus share reinsurance ($50k line)
- 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%)
excess loss
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
ex of excess loss ($250k attachment point, $500k reinsurance purchased)
- primary covers up to $250k
- reinsurer covers $250k-$750k
working cover
type of XS loss coverage
- attachment point in reachable range
- not totally certain on quality of risk (new line, newer market)
per risk
type of XS loss coverage
- typically property
- attachment points/limits apply to each loss event occurring to a specific exposure
CAT XS loss
- protect against specific high severity perils
- attachment point and limit apply to losses arising from a single CAT event
why can reinsurers take on more risk?
- they’re global: more ability to diversify (pooling)
- more capital bc money floods there from investors
aggregate XS loss
- good when worried about correlation
- can attach to not just a nominal event, but once a certain loss ratio is exceeded
