Lists Flashcards
(241 cards)
1
Q
Technical reserves comprise…
A
Past events:
- IBNR
- RBNS (outstanding reported claims)
- claims handling expenses
- re-opened claims
Future events:
- UPR
- AURR
Smoothing:
- catastrophe reserves
- claims equalization reserves
2
Q
Methods to calculate RBNS reserves
A
1) Case-by-case estimates
2) Using statistical methods for totals
3
Q
The size of the free reserves is an important determinant of…
A
1) The amount of business the company can write
2) The size of the risks the company can take on
3) The level of risk present in the investment strategy
4) The need for reinsurance
4
Q
Sources of recoveries
A
Reinsurers
Other insurers
Salvages
Liable third parties
5
Q
Claim characteristics
A
FF DIVAS Have No Clue
Fraudulent claims
Frequency
Delay patterns
Inflation
Variability of claims
Accumulations
Severity
Heterogeneity of risks
Non-independence of risks
Changes to risks
6
Q
Aspects of products to consider (in table)
A
1) Benefits
2) Insured perils
3) Basis for cover
4) Measures of exposure to which premiums are related
5) Claim characteristics
6) Risk and rating factors
7
Q
Requirements for a risk to be insurable
A
First three:
1) Insurable interest
2) Financial and reasonably quantifiable nature
3) Compensation commensurate with loss
Other six:
1) Loss events should be independent
2) Loss events should have a low probability of occurrence
3) Insurer must have an ultimate cap on their liability
4) Moral hazard must be eliminated
5) There must be sufficient data to price the risk
6) Risks should be similar so volatility can be reduced through pooling
8
Q
Aims of having a deductible / excess / franchise
A
1) Reduces the amount of each claim by the excess
2) Reduces the number of claims
3) Eliminates small claims just above the excess, resulting in cost saving
4) Arguably reduces moral hazard
5) May enable company to reduce premiums
9
Q
Situation where exclusions are useful
A
1) Policyholder is at an advantage through possessing greater personal information about the likelihood of a claim
2) The claim event is largely under the control of the policyholder
3) The claim event would be very difficult to verify
4) Loss occurs as part of the normal course of events
5) Risk cannot be reliably estimated by the insurer
6) Probability of loss is very high
7) Where the risk if covered by a third party or another contract
7) To reduce premiums for competitive reasons
8) To reduce the risk of moral hazard and fraud
10
Q
Types of GI products
A
Liability insurance
Property insurance
Financial loss insurance
Fixed benefit insurance
11
Q
How to reduce fraudulent claims
A
1) Watertight, regularly checked policy wording
2) Random spot checks on claims
3) A small number of approved service providers for repairs
4) Publicity to advise against it
12
Q
Aims of exclusions
A
1) To limit the scope of the policy and make it more appropriate for the target market
2) To reduce the premium for competitive reasons
3) To reduce the risk of moral hazard and fraud
13
Q
Exclusions may apply to…
A
1) Particular perils e.g. Terrorism and war
2) To losses of particular types e.g. Losses of cash
14
Q
Types of liability insurance
A
Prodding Electrical Points May be Painful, Must Avoid Doing Erroneously Ever
Professional indemnity a.k.a. E&O
Employer’s liability / workers’ compensation
Product liability
Motor third party
Public liability
Marine liability cover
Aviation liability cover
Directors’ and officers’ liability
Environmental and pollution liability
Errors and omissions liability a.k.a. PI
15
Q
Types of property damage insurance
A
Rolling My Car May Lose me Auto-insurance CGEE
Residential property
Marine craft
Commercial property
Moveable property
Land vehicles
- - private motor
- - commercial motor
- - motorcycle
- - motor fleet
Aviation craft
Goods in transit
Construction
Engineering plant and machinery
Crop insurance
16
Q
Types of financial loss insurance
A
Peculiar Friends Interrupt Business, Can Lose ‘Em
Pecuniary loss cover (credit insurance)
- - trade credit
- - mortgage indemnity
Fiduciary guarantee cover
Business interruption cover
Creditors insurance
Legal Expenses cover
17
Q
Types of fixed benefit insurance
A
Unemployed Healthcare workers Personalise Accidents
Unemployment cover
Healthcare cover
Personal accident cover
18
Q
What generally constitutes a fraudulent claim?
A
1) False claims
2) Invalid claims
3) Genuine exaggerated claims
The rate of fraudulent claims has been observed to increase in times of economic hardship
19
Q
Potential reasons for under-insurance
A
Deliberate:
1) Full insurance may be too expensive
2) The policyholder may believe the the maximum possible loss on any one policy is much smaller than the total value of the insured property e.g. Only insuring the bottom two storeys on a skyscraper against flood damage (This is done with the full knowledge and consent of the insurer and is known as “first loss” cover)
Non-deliberate:
1) Policyholder may not keep an up-to-date list of inventory items
2) Lack of knowledge on the part of the policyholder when valuing items
20
Q
When is funded accounting most useful?
A
1) When the underwriting year is fundamentally important
2) When there are significant delays in premium and claim settlement
21
Q
List the main accounting principles
A
Accountants Get Prudish Speaking about Concepts
1) Accruals
2) Going concern
3) Prudence
4) Separate valuation of assets and liabilities
5) Consistency
22
Q
What may distort the picture given in the published accounts and make comparison to other companies difficult?
A
1) Varying strengths of reserving basis
2) Differences in the basis for valuing assets
3) Changes in the mix of business from one year to the next
4) Treatment in accounts of realized and unrealized capital gains and losses
23
Q
Accounting ratios
A
Operational ratios: (PECCCI)
1) Loss ratio
2) Expense ratio
3) Commission rate
4) Combined ratio
5) Proportion reinsured
6) Investment return
Profit ratios: (PR)
1) Profit Margin
2) Return on Capital
Financial strength ratios: (SA)
1) Solvency ratio
2) Assets:Liabilities
Other:
1) Claims settlement pattern
24
Q
Aims of accounting ratios
A
1) Assess the profitability and financial strength of an insurer frok its accounts
2) Aid comparisons over time and between companies
25
List the three cohorts by which claims can be grouped
1) Underwriting year (consistent with funded accounting)
2) Accident year (consistent with annual accounting)
3) Reporting year
26
List the main providers of general insurance
1) Specialist insurance companies
- composite insurance companies
- general insurance companies
2) Lloyd's syndicates
3) The London Market
4) Self-insuring groups
- captive insurance companies
- protection and indemnity (P&I) clubs
- pools
27
List the main providers of reinsurance
1) Specialist reinsurance companies
2) Direct insurers who also sell reinsurance
3) The London Market
4) Lloyd's syndicates
5) Capital markets
- securitisation
- sidecars
- weather derivatives
- contingent capital (committed capital)
28
List the reasons for setting up a captive insurer
1) Focusing effort on risk management
2) Managing the overall insurance spend
3) Access to the reinsurance market
4) Providing insurance cover not available elsewhere
5) Tax or regulatory advantages
29
Two primary areas addressed by regulation
1) Information asymmetries
2) Maintaining confidence
30
Regulation may target the following areas
1) Restrictions on underwriting
2) Capital requirements
3) Investment requirements
4) Reporting requirements
5) Authorisation requirements
6) Other requirements to protect policyholders
31
List the disadvantages of regulation
1) Monitoring and compliance costs
2) Fewer business opportunities
3) Lower investment returns
4) Barriers to entry
5) Higher costs passed on to policyholders
6) Fewer economies of scale
7) Less insurance provision to some sectors of the population
32
List the restrictions and requirements a regulator might put in place on underwriting
1) On amount/type of business that can be written
2) Limits on contract terms and premium rates that can be charged
3) Restrictions on info that may be used in underwriting and premium rating
4) Requirements to publish premium rates before they can be used
5) Restrictions on countries a GI company can write business in
6) Mandatory restrictions on cover
7) Prohibiting illegal products being sold
8) Requirements to offer certain cover
33
List the restrictions and requirements a regulator might put in place on capital
1) The requirement to deposit assets to back claims reserves
2) Requirement to jold a claims equalization reserve
3) Requirement to maintain a minimum level of solvency
4) The use of prescribed bases to calculate premiums, asset values and liabilities to demonstrate solvency
5) The requirement for risk-based capital calulations
34
List the restrictions and requirements a regulator might put in place on investments
1) Restrictions on the type of or amount of certain assets allowed to demonstrate solvency
2) Prevention from holding certain assets
3) Requirement to hold prescribed assets
4) Restrictions on the currency, domicile and duration of assets allowed to demonstrate solvency
5) Restrictions on the amount of investment in any one company or grouo
6) Custodianship of assets
35
List the restrictions and requirements a regulator might put in place on reporting
1) Disclosure/transparency of reporting requirements
2) Requirement for a statement of actuarial opinion
3) Restrictions on the type of reinsurance that may be used
4) Restrictions on the discounting of liabilities and discount rates that can be used
5) Requirements fo GI companies to be audited
36
List the restrictions and requirements a regulator might put in place on authorisation
1) Initial authorization of new insurance companies
2) Licensing agents to sell insurance and requirements on the method of sale
3) Requirements for management to be fit and proper
37
List the other restrictions and requirements a regulator might put in place to protect policyholders
1) Requirements to purchase reinsurance
2) Legislation to protect policyholders should GI insurance companies fail
3) The requirement to pay levies to consumer protection bodies
4) A cooling off period
5) Advertising restrictions
6) Regulations with respect to TCF
7) Restrictions with respect to anti-competitive behaviour
38
List the most relevant economic factors to the GI market
1) Claims inflation
2) The underwriting cycle
3) Investment conditions
4) Currency movements
39
List the most relevant legal, political and social factors to the GI market
1) Court awards
2) Legislative changes
3) Trends in behaviour and awareness
40
List the most relevant climate and environmental factors to the GI market
1) Weather
2) Catastrophes
3) Latent claims
41
Which factors facilitate the underwriting cycle?
1) Low barriers to entry
2) The delay until profitability of business written is known
3) Simplistic capital regimes
4) Marginal costing
42
List the reasons for retrocession
1) To gain additional capacity
2) To contain or reduce risk of loss on a specific or aggregate basis
43
Advantage of facultative reinsurance
The flexibility offered to both direct writer and reinsurer
44
Disadvantages of facultative reinsurance (to insurer)
1) It is time-consuming and costly
2) There is no certainty that the required cover will be available when needed
3) Even if cover is available, the price and terms may be unacceptable
4) The primary insurer may not be able to accept a large risk until it has found reinsurance cover - it cannot accept business immediately and this might reduce its standing in the market
45
Advantages of treaty reinsurance (for insurer)
1) Efficiency - risks are reinsured automatically. This is administratively quicker and cheaper
2) Certain - the direct writer knows what reinsurance is available and on what terms
46
Disadvantage of treaty reinsurance
Inflexibility - once the treaty is set up, then both parties must operate within the terms of the treaty
47
The treaty must be precise when defining...
1) What is and is not covered
2) The financial arrangements (premiums, commissions, timing of payments)
3) The obligations of both parties
48
List the factors on which the an insurer's need for reinsurance depends
1) The size of the insurer
2) Its experience in the marketplace
3) Its portfolio of risks
4) The types of business written
5) Its level of free assets
49
When might an insurer need a reinsurer's expertise?
1) When entering new markets
2) When writing in new territories
3) When developing a new product
4) When writing unusual risks
50
List the different ways of writing traditional reinsurance
1) Facultative
2) Treaty
3) Proportional
- Quota share
- Surplus
4) Non-proportional
- Excess of loss
- - Risk XoL
- - Aggregate XoL
- - Catastrophe XoL
- Stop loss
5) Policies-incepting basis/risks-attaching basis (Usually ised for proportional reinsurance)
6) Losses-occuring basis (Usually used for non-proportional reinsurance)
7) Claims made
51
Advantages of quota share (to the insurer)
1) Spreads risk (enabling insurers to write larger portfolios of risk and encourages reciprocal business)
2) Directly improves the solvency ratio and helps the insurer to satisfy the statutory solvency requirement
3) Is administratively simple
4) Enables reinsurance commission (which may help with cashflow)
52
Disadvantages of quota share (to the insurer)
1) It cedes the same portion of low-variance and high-variance risks
2) It cedes the same proprtion of each risk, regardless of size
3) It passes a share of any profit on to the reinsurer
4) It does not cap very large claims, thus does not effectively protect the insurer from catastrophes
53
Advantages of surplus reinsurance (to the insurer)
1) It enables the insurer to write larger risks, which might otherwise be beyond its writing capacity (particularly suitable for large property risks, which are large enough to merit the individual attention)
2) It enables the insurer to choose, within limits, the size of the risks it will retain (helping control overall business volumes and fine-tune experience)
3) It is useful for those classes where a wide variation can occur in thebsize of risks
4) It helps to spread risks
5) It helps to diversify exposure
6) Enables commission (which may help with cashflow)
54
Disadvantages of surplus reinsurance (to the insurer)
1) The administration is more complicated than for quota share (owing to the need to assess and record separately for each risk the amount to be ceded)
2) The treaty terms may not be flexible enough
3) Is unsuitable for:
- unlimited covers
- personal lines cover where the potential losses are small compared to the insurer's resources
55
Advantages of excess of loss (to the insurer)
1) It allows an insurer to accept risks that could lead to large claims
2) It reduces the risk of insolvency from a large claim, aggregation of claims or a catastrophe
3) It stabilizes the technical results of the insurer by reducing claim fluctuations, thus smoothing results
4) It helps make more efficient use of the capital by reducing the variance of the claim payments
56
Disadvantage of excess of loss (to the insurer)
1) Reinsurance premiums are likely to be higher than recoveries in the long run - premiums will depend on risk appetite in market
57
List the main features of financial reinsurance
1) Limited assumption of risk by the reinsurer
2) Risk transfer and risk financing are combined
3) Sharing of the results with the cedant
4) Explicit inclusion of investment income in the contract
5) Multi-year contract term
58
List the main types of financial reinsurance (finite risk reinsurance)
1) Pre-funded arrangements
2) Post-funded arrangements
FIST
Financial quota share
Industry loss warranties
Spread loss covers
Time and distance deals
59
List the circumstances under which run-off reinsurance may be sought
1) Corporate restructuring
2) Mergers and acquisitions
3) When closing lines of business
4) Economic changes in the value of the liability
5) Regulatory, accounting or tax changes
6) Legal developments
60
List the two main types of run-off reinsurance
1) Adverse development cover
2) Loss portfolio transfers
61
Advantages of LPTs
1) They can improve the credit rating of the original insurer
2) The new insurer will gain diversification if not already in this area and achieve a larger client database
62
Disadvantages of LPTs
1) Assets may need to be realised to pass across the value of the reserves to the accepting insurer (particularly important if there is mismatching or if tax losses would be crystallised)
2) If the new insurer defaults, this can damage the reputation of the original insurer
3) The transfer may require the buy-in of existing reinsurers
4) There will be an associated cost to the original insurer of the risk transfer, which will depend on the current risk appetite of the market
63
List the two functions of the ceding commission
1) Contributes to costs incurred by direct writer
2) Implicitly prices for risk taken on by reinsurer
64
The degree to which reinsurers can influence the underwriting and claims management of the direct writer will depend on...
1) The wording of the treaty
2) The nature of the relationship between the parties
65
Steps to take when analysing need for reinsurance
1) Analyse the classes of insurance sold
2) Analyse the needs of the direct writer
3) Consider all the different reasons for using reinsurance
4) Consider the different types of reinsurance and use a process of elimination
66
List the factors that determine the choice of reserving methodology and basis
1) The purpose of the reserving exercise
2) The data available
3) Historical trends and patterns
4) The factors that determine development of claims
5) The timing of run-off of liabilities
6) The class of business
7) The age of the business
67
If not specified, the discount rate needs to be determined based on...
1) Currency of liabilities
2) Nature of liabilities and assets
3) Risk-free yield curve at the valuation date
68
List the three accounting bases used for published accounts
1) Going concern basis
2) Run-off basis
3) Break-up / wind-up basis
69
When communicating the uncertainty of results, an actuary should....
1) Be consistent with vocabulary used by other professionals
2) Explain terms used
3) Emphasise the bigger isssues
4) Emphasise the unusual issues
5) Ensure stakeholders understand the level of uncertainty
6) Present the range of outcomes for possible scenarios
7) Show numerical consequences for changes in assumptions
8) Comment on uncertainty in context of scope and purpose of investigation
9) Avoid misunderstandings
70
List the most popular reserving methods
1) Triangulation/statistical methods
- Basic chain ladder method
- Inflation-adjusted chain ladder method
- Expected loss ratio method
- Bornhuetter-Ferguson method
- Average cost per claim method
- Cape Cod method
7) Berquist-Sherman method
8) Curve fitting
9) Factor-based approaches
10) Exposure-based approaches
11) Case by case estimates
71
Advantage of grouping by accident year
All claims stem from the same exposure cohort (so are usually subject to the same risk environment)
72
Disadvantage of grouping by accident year
Full number or amount of claims in cohort is not known until the last claim is reported. This relies on detailed claims records being maintained over many years.
73
Advantages of grouping by underwriting year
1) We can follow the total outcomes of all policies written in each year
2) Terms, rates and conditions are often more stable by underwriting year
74
Advantage of grouping by underwriting year
It will take more than a year before all the claims under an underwriting year cohort emerge (exacerbated by reporting delays)
75
Advantages of grouping by reporting year
No further claims will be added to the cohort after the end of the reporting period. Thus, at the end of the cohort-defining reporting period there is a known group of claims to be tracked during the run-off
76
Disadvantages of grouping by reporting year
1) Projection methods based on this cohort will not include IBNR
2) Claims will have come from several exposure periods, thus this method will not pick up on changes in exposure or risk profile
3) It is difficult to find an exposure measure that would correspond to the definition of risk under the claims being developed (possibilities include ave premium and current premium)
77
Strengths of the chain ladder method
1) Can be applied to a wide variety of sets of data
2) Can be used to project triangle data to ultimate run-off
3) Can be easily modified to allow for data distortions
4) Conceptually straightforward and easy to relate results back to pattern of development
5) Can be used as a starting point for other methods
6) Can easily incorporate inflation (both past and future)
78
Weaknesses of the chain ladder method
1) Results can be distorted by unusual experience
2) Limited use for recent cohorts with little development (particularly for long-tailed classes)
3) Considerable care is needed in applying this method to prevent unusual features in the data having a significant impact on the results
79
Strengths of the expected loss ratio method
1) Not distorted by anomalous data
2) Straightforward
80
Weaknesses of the expected loss ratio method
1) Ignores the pattern of claims development to date
2) Difficult to adjust for large claims
3) If loss ratios are derived from past years, rhis method will replicate past biases
4) The benchmarks used may not be appropriate as the business written may be different to that to which the benchmarks relate
5) Ultimate loss ratios (ULR) from previous years may be under- or overstated due to fluctuations in experience
6) ULRs from previous years may become unsuitable for use due to changes in environment
7) Underlying assumptions can be subjective
8) Changes in premium rates invalidates use of old loss ratios
81
ULR
Ultimate Loss Ratio
82
Strengths of the Bornhuetter-Ferguson method
1) Incorporates both historic claims run-off patterns and estimated ultimate loss ratios
2) Can be used when claims data is at a very early stage of development
83
Weaknesses of the Bornhuetter-Ferguson method
It can be difficult to gather information for the a prior estimate of ULR, upon which projections are very dependent when there is limited historic run-off data
84
Strengths of average cost per claim (ACPC) method
1) Easy to understand and communicate
2) Provides information on both claim numbers and claim amounts
3) Data required is generally available (particularly for direct business)
4) Can be used in conjunction with other methods
5) Helps explain volatile data and results when data contain only a small number of claims
6) Can be applied to settled claims even when reserving protocols have changed over development history
7) Can be useful as a basis for estimating latent claims
85
Weaknesses of ACPC method
1) Can be distorted by reopened claims, nil claims and partial payments
2) Assumes that the distribution of claims is the same for each origin year or settlement year
3) Needs detailed information on both amounts and numbers of claims
4) Small data samples may lead to volatile projection results
86
When to use the chain ladder method
When we have a sufficient number of years of historical data that are homogeneous and consistent
87
When to use the expected loss ratio method
1) To check other methods (since it ia so simple to apply)
2) When data is scanty, unreliable or missing
88
When to use the Bornhuetter-Ferguson method
1) Where avaliable data is sparse (which is the case for more recent origin cohorts and cohorts from longer-tailed portfolios)
2) Where premium volumes are so small that claims activity is expected to be extremely volatile
3) At shorter durations
89
When to use the ACPC method
We can only apply the method when appropriate size and number data is available.
This method provides more detailed information than others, but is not warranted when claim numbers or ACPC is not meaningful
90
List the types of data that can be projected in a triangle
Premiums
Individual claim sizes
Aggregate claim amounts
Claim numbers
For:
Reported claims
Paid claims
Incurred claims
Reopened claims
91
Under SAM, the best estimate is characterised as...
1) A point estimate
2) Not inherently optimistic or pessimistic
3) Based on sound and appropriate actuarial/statistical techniques
4) Based on current and credible information
92
List the factors that may affect the stability of the claims development pattern
1) Distortions in data
2) Changes in terms and conditions
3) Changes in claims handling processes
4) Changes in the mix of business
5) Changes in average policy length
6) Changes in commencement of writing policies
7) Seasonality
8) Claims reviews
9) Market-wide initiatives
10) Changes in reserving policy
11) Developments in business, economic and legal environments
12) Large claims
13) Inflation
14) Latent claims
15) Catastrophes
93
List the steps to be followed when carrying out a basic chain ladder calculation
Assuming we're using aggregate claim amounts
1) Tabulate claims on a cumulative basis by origin year and development year
2) Calculate the development ratios
3) Apply these ratios to complete the table
4) From the cumulative results find the amounts expected for wach future origin year/development year cell
94
List the terms used to identify the sources of uncertainty or error
1) Process uncertainty
2) Parameter uncertainty
3) Model error
4) Systemic error
95
Advantages of using alternative sets of assumptions
1) It is very simple to perform on deterministic or stochastic models
2) The use of judgement can allow for atypical volatility in historical data
96
Disadvantages of using alternative sets of assumptions
1) We assign no explicit probability to each set of parameters, so we cannot estimate the distribution of future outcomes
2) This method ignores model uncertainty
3) Applying this method to a deterministic model does not allow for process uncertainty
97
Advantages of scenario testing
1) It provides an advantage over a stochastic model by allowing more detailed analysis of the tail end of the reserve distribution
2) When performing a scenario test, we pay particular attention to the likelihood of coincidence of adverse factors
3) Scenario analysis is focused and can be aimed at a specific question being asked
4) Due to this focused nature, tests can be performed more quickly than for stochastic models
5) Scenario tests are more transparent than stochastic models so their results are easier to communicate
6) Results are often easier for management to understand without detailed explanation
7) Model uncertainty is less troublesome because we consider the driving factors explicitly
98
Disadvantages of scenario testing
1) There is no specific probability associated with the outcomes and so it is not possible to construct a distribution of outcomes
2) Scenarios typically only give information on the extremes of the distribution
3) Scenario testing is more subjective than stochastic modelling and the use of alternative sets of assumptions
99
Advantages of Bayesian stochastic reserving
1) Provides a complete predictive distribution of the ultimate reserve (so many statistics such as quantiles, confidence intervals and probabilities of extreme values can be calculated)
2) Explicitly shows the impact if judgements
3) Could give closed form results when an appropriate prior distribution is chosen
100
Disadvantages of Bayesian stochastic reserving
1) The choice of the prior distribution is subjective
2) Posterior distribution may be over-reliant on the choice of prior distribution
3) May not give closed form results
101
List the random factors that influence final run-off (when thinking of run-off as a random variable)
1) The frequency and severity of claims
2) The delay patterns on individual claims
3) Legal changes that affect the size of court awards
4) Legal changes that affect the "heads of damage"
5) Changes in the litigiousness of society
6) Levels of claims inflation
7) Court rulings on liability or quantity of individual claims not in historic data or not forseen by claims handlers
8) Changes in the mix of claim types
9) Changes in claims handling
102
List the three main benefits offered by the stochastic approach to reserving
1) We can estimate the reliability of the fitted model and the likely magnitude of random variation
2) We may apply statistical tests to the modelling process to verify any assumptions and understand variability
3) We can develop models in which figures with large random components should have relatively little influence
103
List the uses of stochastic claims reserving
ACMAID
1) Assess reserve adequacy
2) Compare different estimates and datasets
3) Monitor performance
4) Allocate capital
5) Inform investors
6) Discussion facilitation with regulators
104
List the methods used to test a model
1) Examining plots or triangles of residuals
2) Using F tests to establish which parameters to include
3) Fitting the model to past data
105
List the three types of models into which stochastic reserving models can broadly be split
1) Analytical methods
- Mack method
2) Simulation methods
- Monte Carlo methods
- Bootstrapping
3) Bayesian methods
106
List the key assumptions of the ODP model
1) The run-off pattern is the same for each origin period
2) Incremental claims amounts are statistically independent
3) The variance of incremental claims amounts is proportional to the mean
4) Incremental claims are positive for all development periods
107
List the most common diagnostics
1) Changes in loss ratios
2) paid/incurred claims ratios
3) case estimates / incurred claims ratios
4) Average outstanding case estimate
5) Ratio of IBNR to case estimates
6) Survival ratios
7) Claim frequency
8) Average cost per claim
9) Net amounts / gross amounts
108
List the benchmarks against which a claims development pattern can be checked
1) Industry and market sources
2) Other closely related classes
3) Similar portfolios the actuary has encountered
109
List some possible reasons why two parties may derive different reserve results for the dame period
1) The data used may have been more complete, more detailed or of better quality for one party
2) They could have used different methodologies
3) Their assumptions may have been different
4) One may have had access to additonal information from underwriting and claims handling staff
5) There may be genuine differences of opinion
110
List reasons why data can be a particular problem for reinsurers
1) Claim reporting delays are longer
2) There is greater tendancy for claims to develop upwards
3) Exposure can be very heterogenous
4) Data can be sparse
5) Bemchmarks are often less relevant
6) There can be IT constraints
7) There is more opportunity to group data differently
111
List the ways in which we could group data
1) Type of contract
2) Type of cover
3) Basis of cover
4) Line of business
5) Attachment point
6) Territory
7) Type of cedant
112
List the five methods of reserving for outwards reinsurance
1) Use data gross and net of reinsurance, then find the difference
2) Perform standard triangulation techniques directly on reinsurance data alone
3) Adjust gross data using a broad brush approach
4) Case-by-case approach on only rhe largest losses
5) Develop all individual losses, then apply the reinsurance to each one
6) Derive a reserve distribution net of reinsurance
113
The suitability of any method of reinsurance reserving can be assessed by considering...
1) Its simplicity vs accuracy
2) The consistency of gross and net estimates
3) Whether it can be used to assess volatility of net outcomes or reinsurance recoveries
4) Compliance with regulation
5) Whether a method can be used to investigate
- capital requirements
- enterprise risk management (ERM)
- credit risk
6) How the method copes with
- different types of reinsurance
- sparse data
- changes in reinsurance programme over time
- reinsurance recoveries on unreported claims
- catastrophes and large claims
- aggregate features e.g. profit commissions
- interactions between covers
114
Advantages of using data gross and net of reinsurance, then finding the difference
1) Simple to apply and understand
2) Simple to add to a semi-automated reserving process
3) Can be used to assess the volatility of net outcomes
4) Appropriate for proportional reinsurance or very high XoL reinsurance where there are few recoveries made
5) Appropriate where the reinsurance programme has been relatively stable over a number of years
6) Simple to adjust the method to allow for major catastrophes
115
Disadvantages of using data gross and net of reinsurance, then finding the difference
1) There is a possibility of implied negative reinsurance recoveries (net reserves > gross reserves)
2) May not be appropriate where reinsurance protections have changed
3) May be less appropriate than non-proportional covers
4) Cannot allow for some features of individual reinsurance contracts
5) Cannot accurately allow for claims that breach the vertical cover unless they are adjusted for separately
6) Will not allow accurately for interaction between whole account and line-specific covers
7) The lack of direct link between gross and net experience could lead to inconsistent results for management decisions
116
Advantages of applying standard triangulation techniques to reinsurance data
1) Relatively simple to understand
2) Simple to add to a semi-automated reserving process
3) Can be used to assess volatility of insurance recoveries and so also assess credit risk
4) Simple to adjust the method to allow for major catastrophes
117
Disadvantages of applying standard triangulation techniques to reinsurance data
1) It may be difficult to assess development patterns as data can be sparse
2) May not be appropriate when reinsurance protections have changed
3) Changes in reinsurer panel can change payment development patterns, which this method will not capture accurately
4) Does not allow accurately for individual contract features
5) Does not allow for individual claims breaching the vertical cover limits unless they are adjusted for separately
6) We cannot be sure that gross and net positions are consistent
118
Advantages of applying broad brush factors to projected gross data
1) More accurate treatment of proportional business
2) Still reasonably simple
119
Disadvantages of applying broad brush factors to projected gross data
1) All the issues with reserving for inwards reinsurance still apply for non-proportional business
2) Requires the ability to identify reinsurance premiums and recoveries data by cover type and line of business
3) Requires more information e.g. Detailed knowledge of current and historical proportional covers
120
Advantages of case-by-case reserving
1) Simple
2) Consistent with corresponding gross losses
3) Appropriate for catastrophe covers and high excess reinsurance
121
Disadvantages of case-by-case reserving
1) Requires detailed knowledge of current and historical reinsurance covers
2) Separate allowance needs to be made for recoveries on large IBNR claims
3) Not practical for stop-loss, proportional reinsurance or working layer non-proportional reinsurance
122
Advantages of developing individual losses and applying the reinsurance programmes to them
1) Capable of treating the features of each contract accurately
2) Consistent with corresponding gross losses
3) Allows the assessment of the distribution of reinsurance recoveries
4) Can allow for complex programmes such as for stop losses and aggregate covers
123
Disadvantages of developing individual losses and applying the reinsurance programmes to them
1) Complex and time-consuming to set up and less suitable for simple programmes
2) Development of individual losses is a controversial process
3) Can involve significant subjectivity
4) How to allow for reinsurance recoveries for unreported claims
5) Requires detailed knowledge of all current and historical covers
124
List possible reasons for a reporting delay
1) The policyholder is unable to report the claim due to illness or injury
2) The policyholder is unaware that a claim needs to be made (e.g. A burglary occurs while on holiday)
3) Policyholders do not realise there is cause for claiming (e.g. Industrial diseases)
4) Policyholders may be slow in getting round to advising the insurer, possibly because the amount involved is quite small
125
The uncertainties faced by a general insurer can be considered under two main headings...
1) Uncertainty as to the outcome of business already written
2) Uncertainty as to the premiums the insurer needs to charge in future to achieve a desired financial result
126
The elements that contribute to uncertainties can be classified under four main headings...
1) Those that affect the claims experience
2) Those that affect expenses
3) Those relating to investments
4) Business risks
127
Uncertainties relating to claims experience stem from....
ADJECTIVAL CELIAC CUR
Anti-selection
Delay patterns
Judicial decisions
Economic conditions
Characteristics of policyholders
Types of policies and cover
Interpretation of wording
Volatility in claim size
Attitudes of policyholders towards claiming
Legislation / regulation
Catastrophes
Escalation of claims
Latent claims
Inflation
Accumulations of risk
Currency risk
Crime rates
Underwriting inadequacy
Reinsurance risks
128
The main expense risks relate to...
1) Commission
2) Mix of business
3) Changes of the progression of staff and accommodation costs
4) Changes in professional and legal costs
5) Changes in the rate of inflation
6) Doubts about the allocation of expenses leading to incorrect management decisions
129
The main investment risks relate to...
1) Market conditions
2) Proportion of insurer's assets available for investment
3) Timing of claim payments
4) Poor investment management
5) Liquidity
6) Reinvestment
7) Mis-matching by CUNT
8) Security of assets
9) The quantity of free assets in relation to those assets backing liabilities
10) Movements in assets values
11) Movements in currency rates
130
The main types of business risk are...
1) Failure of a third party
2) Timing risk
3) Competition
4) The insurance cycle
5) New business and lapses
6) Operational risks
7) Group risks
131
Implications of a low level of solvency
1) Intervention by a supervisory authority
2) A need to restrict business to prevent such intervention, resulting in possible loss of profitable business
3) A loss of market confidence, leading to loss of business and falls in share price
4) The need to purchase more reinsurance to increase protection against fluctuations
5) Constrained investment activity
132
An insurer's arrangements for outward reinsurance may be subject to uncertainties stemming from...
1) Inadequate appreciation of the scale of insurance needs
2) Availability and cost of desired reinsurance
3) Difficulty in assessing whether available reinsurance represents good value for money
4) Whether catastrophe reinsurance will prove satisfactory
- size of retention
- reinstatement provisions
- upper limit of cover
5) The ability to make reinsurance recoveries (credit risk)
6) Failure to comprehend the true coverage of a reinsurance agreement and the resulting exposure to risk in areas that were thought to be reinsured
133
List the risks associated with competitive markets
1) Products offered may not appeal to potential customers
2) Prices necessary to achieve a satisfactory financial result may be too high to be competitive
3) As a consequence of losing business to competitors, unit costs rise so that it is even harder to price products competitively
4) If insurers deliberately under-price in response to competition, the prices they actually charge may be insufficient to produce a satisfactory result
5) Their administrative structures and channels for obtaining business may become obsolete
134
The inability to make profits at the bottom of the insurance cycle could lead to...
1) Loss of business
- putting pressure on the ability to recoup fixed expenses
- putting pressure on future growth prospects
2) A reduced solvency position
- requiring additional capital support
- requiring other remedial action
3) During the upswing when market rates are increasing, the insurer keeps premiums low to recoup market share and thus experiences excessive growth at unprofitable levels
135
Types of operational risks
FACETS PG
Fraud risk
Administration risk
Compliance risk
Event risk
Technological risk
Strategic risk
Pension scheme risk
Governance risk
136
Types of group risk
CRC PG
Capital risk
Reputational risk
Centralized functions risk
Political risk
Group reinsurance
137
STEPS involved in a rating analysis
1) Estimate ultimate claims
2) Estimate profitability of existing rates
3) Projection forward to the new rating period
4) Reviewing the suitability of the existing rating structure
5) Comparing results with those of competitors
6) Analysing the profitability of old years' business on new rates
138
When presenting results we must communicate...
1) Data
- source
- preparation
- verification
2) Reliance on assumptions
3) Uncertainty of results
4) Methodologies and definitions used
5) Key features of the results
6) Reasons for key features of results
7) How actual compares with expected
139
List the main analyses carried out on claims
PR CRISIS FNN
Partial payments
Re-opened claims
Concentration of claims and risk
Recoveries on gross claims
Incidence of large claims
Splitting indemnity costs from expenses
Impact of large claims
Severity changes
Frequency changes
New types of claim
Nil claims
140
List the main items of expense for a general insurer
1) Salaries and related costs
2) Property costs
3) Computer costs
4) Investment costs
5) Once-off capital expenses
6) Claims handling costs
141
List two reasons to allocate expenses
1) To include an accurate allowance for expenses in premium rates
2) To assess the profitability of previous rates
142
Types of reinsurance investigations include analyses of...
1) The required risk retention allowing for the solvency position
2) The extent of exposure to accumulations of risk
3) The need for catastrophe reinsurance
4) The need for reinstatements
5) The value for money of existing insurance
6) The appropriateness of existing cover
7) The profitability of layers
8) The effects on capital
9) The cost of commutation
10) Reinsurers' solvency levels and the subsequent need for bad debts provision
143
List the main reasons for monitoring business written
MASAI Gain market intelligence to Validate assumptions
Manage risk
Assess performance against goals
Satisfy the regulators
Assist with reserving
Influence the market
Gain market intelligence
Validate assumptions as part of ACC
144
List the key factors of written business to be monitored
1) Volumes of quotations
2) Persistency and profitability by source
3) Premium changes
- direct calulation for each risk separately
- direct calculation using a standard risk
- measuring rate changes on individual renewals
- using underwriters' views
4) Portfolio movements
- lapses at renewal
- new business volumes
- quotes that result in written business
- mid-term cancellations
- policy endorsements
- mix of business
145
List the four main methods of calculating premium rate changes
1) Direct calulation for each risk separately
2) Direct calculation using a standard risk
3) Measuring rate changes on individual renewals
4) Using underwriters' views
146
List the desirable features of a system for monitoring business
1) Output tailored to needs
2) Accurate and validated results
3) Easy to use and well documented
4) Consistent over time
5) Consistent with other data sources and analyses
6) Minimal delay between data cut-off and production of results
147
List the uses for actuarial investigations
1) Carry out profit testing
2) Estimate price elasticity
3) Create lifetime pricing models
4) Redesign rating tariffs
5) Help with other pricing and reinsurance decisions
6) Feed into other processes e.g. capital modelling
148
The reserve estimate should be supported by...
1) Documentation
2) Recons of base data to accounting records
3) Explanation of key drivers of results
4) Reasons for changes in reserves over time
149
List the reasons for analysing investments and capital
1) To evaluate the existing portfolio
2) To assess capital requirements, risk and investment policy
3) To allocate capital between classes
4) To determine return on capital
150
List ways an insurer may check their reinsurers' solvency levels
1) Checking external ratings
2) Checking their financial statements
3) Checking the analyses prepared by reinsurance brokers
151
List the three main purposes for which actuaries need data
1) Pricing
2) Reserving
3) Capital modelling
152
List sources of internal data
1) Policy information collected from proposal form
2) Premium information
3) Claim information collected from claim form
153
List sources of external data
1) Census data
2) Industry-wide collection schemes
3) Foreign census data
4) Foreign industry-wide collection schemes
5) Competitors' published accounts
154
List the advantages of participating in industry-wide data collection schemes
1) Allows insurers to compare their own experience with industry experience
- on an overall level
- at the level of categories into which data is classified
2) Allows insurers to use industry experience as a benchmark to assess their position compared to their competitors
3) Industry-based development factors may be valuable as benchmarks when reserving
4) Gives greater insight into the business an insurer may be trying to attract away from a competitor
155
List the disadvantages of using data from industry-wide data collection schemes
1) Lack of detail and flexibility and so more difficult to manipulate
2) Differences in policies sold
3) Different target markets
4) Differences in sales methods
5) Differences in nature of data stored by different companies
6) Differences in coding used for risk factors
7) External data is often more out of date than internal data
8) The data quality will depend on the quality of the data systems of all contributors
9) The industry data may not be a true reflection of the entire industry's experience
156
List the reasons why, ideally, all functions should be controlled by one integrated data system
1) There is reduced chance of existing data being corrupted
2) There is reduced chance of inconsistent treatment of information
- between products
- over time
3) There is likely to be a better level of control over those who may enter and edit information
4) Information will be easier to access
5) Time will not need to be spent reconciling data from different systems
157
List the main uses of policy and claims data by a general insurer
AMERICA Makes Poor People Suffer Real Racism
Administration
Marketing
Experience statistics
Risk management
Informing investment strategy
Capital modelling
Account preparation
Management information and financial control
Product costing
Performance analysis
Statutory return preparation
Reserving
Rating for premiums
158
List the persons who should be included in the full development team for the computer system
1) Senior management
2) Accountants
3) Underwriters
4) Claims managers
5) Marketing
6) Investment
7) Computing staff
8) Reinsurers
9) Actuaries
159
The availability of data of good quality and quantity will vary....
Between organizations
- the size and age of the company
- the current data system in use
- the use of legacy systems
- the integrity of data systems in use
- the staff responsible for collecting and maintaining data
- the nature of the organization
Within organizations
- depending on the distribution method of the business
- between the different classes of business and
160
How might data vary depending on the distribution method of the business?
Distribution channels will differ by the roles they play in...
- sales, admin and claims processes
- their level and form of remuneration
- the manner and speed with which they process policies and claims
161
How might data vary depending between the different classes of business within a single organization?
Classes of business will differ by...
- claim frequency (which affects quantity of data)
- length of tail (which affects the time taken to collect data)
- subjectivity used in underwriting (which influences the ability to capture risk details)
162
List the requirements for the questions on proposal and claim forms
1) Clear
2) Unambiguous
3) Objective
4) Able to easily input data into a computer system
163
List the key features relating to premium data
1) Written amounts (net and gross)
2) Payment times
3) Premium adjustments
4) Commission
5) Other deductions
6) Cross-selling information
164
List the key features relating to claims data
1) Definition of a claim
2) Estimated outstanding amounts
3) Multiple claim payments
4) Re-opened claims
5) Claims handling expenses
6) Recoveries
- reinsurance
- subrogation
- salvage
7) Class-level adjustments
165
List the types of outgo prompted by a valid claim
1) Benefit/indemnity payments made to policyholders
2) Compensation to third parties
3) Payments to claimant's soliciters
4) Payments to loss-adjustors
166
List the differences in insurer attitudes towards recording movement data
1) Differences when case estimates are first set up
2) Differences in the method used to determine the case estimate amount
3) How often these estimates are revised
4) When claims may be closed
- as soon as last payment has been made
- as soon as we have an expected payment date for last outstandingly monies
- following a once-off review of a book of business
- when insurers check their books periodically
167
List the potential errors that may be in the data
1) Wrong policy or claim number
2) Wrong risk details
3) Wrong dates
4) Wrong claim types
168
List the potential distortions that may be in the data
1) Claims inflation
2) Changes in procedures
3) Case estimates
4) Delays
5) Large claims
6) Return premiums
169
List checks that can be used to avoid such errors
1) Check digits in policy/claim identifying numbers
2) Data field integrity checks
- minimum values
- maximum values
- nonnegative values
3) Mandatory fields
4) Error reports
5) Adequate training of staff
- before they handle any data
- if any changes are made to computer systems
170
Consequences of inclusion of incorrect data
1) False accounting
2) Inappropriate reserving
3) Pricing wrongly
4) Failure to make recoveries
5) General management mistakes
If reserves calulated from the data are incorrect, this will distort the reported results and tax payments
If premium rates calculated from the data are incorrect, this could lead to unprofitable or uncompetitive rates or anti-selection
171
List the information to be recorded for each policy
1) A unique policy identifier
2) A code to link to policy information
3) Risk definition
4) Details of cover
5) Policyholder's risk factors
6) Status of present record
7) Control dates
8) Relevant amounts and currencies
9) Payment dates more applicable
10) Administrative details
172
List the information to be recorded for each claim
1) Unique claim identifier
2) Code to link to policy information
3) Details of claim
4) Status of present record
5) Control dates
6) Dates and amounts of payments
8) Dates and amounts of movement data
9) Currency of both payments and amounts outstanding
10) Rating factor details
173
List the STEPS to establish a good information system
1) Consideration of the users' requirements
2) Careful design of appropriate proposal and claim forms
3) Ensuring that necessary features of premiums and claims can be recorded
4) Consideration of policy and claim information to be collected
5) Adequate training of staff
174
The pricing methodology used will depend on...
1) The class of business being priced
2) The availability of relevant data
3) The market in which the company is operating
175
List the four main statistical methods to calculate the pure risk premium
1) Simple burning cost approach
2) Frequency-severity approach
3) Multivariate models
4) Original loss curves
176
List ways to deal with anomalous events and untypical experience underlying the data
1) Remove the claims arising from such sources
2) Choose a more typical base period
3) Collect more years' data
4) Apply an adjustment factor
177
List situations in which external data may be useful
1) The company's own data is sparse
2) The company is writing a new or unusual class of business
3) To provide confirmation of results derived from internal data
178
When pricing, data from the most recent years may need adjusting for...
1) IBNR
2) Unsettled claims
179
List the conditions surrounding the dates of cover that must be allowed for in proposed premoum rates
1) Unusual features in base period data
2) Trends that are expected to continue
3) Changes in risk
- mix
- cover
- underwriting
- reinsurance
4) Claims inflation
5) Environmental changes
180
List two ways in which we can allow for investment income in the office premium
1) Discounting the projected claim and expense cashflows at a suitable rate of interest to the date at which the premium is paid
2) Subtracting a loading from the premium to recognize that the insurer can earn some investment income
181
List the factors that affect the (negative) loading for investment income on the risk premium
1) Duration of investment
2) Form of liabilities
3) Assets to be held
4) Consistency with inflation assumption
5) Investment conditions
182
STEPS for analysing claims:exposure ratio and using it to estimate future claims
1) Collect relevant data
2) Adjust the data to make it more relevant
3) Group data into risk grouos
4) Select the most appropriate rating model for the specific case
5) Analyse the data
6) Set the assumptions required by the model
7) Test the assumptions for goodness of fit or likelihood probability
8) Run the model to arrive at an estimate of future claims costs
9) Perform sensitivity and scenario testing to check the validity of the estimate
183
List the ways we can deal with large non-catastrophe losses in our claims data
1) We can omit them from the analysis and allow for them separately in the risk premium
2) We can truncate large claims at a set point and spread any cost above thos level across the larger portfolio of risks
3) We can leave large claims in the data, although we rarely do this because it would implicitly assume that future occurrences will replicate those seen in the past
184
List the STEPS involved in determining the required expense loadings
1) To allocate the expenses by class/product
2) To allocate expenses by function
- initial
- renewal
- termination
3) To decide how to allow for each expense type in the rating formula
- % of premium
- % of claim
- fixed amount per policy
- fixed amount per claim
185
List the alternative pricing techniques that have to be used where there is little internal data
1) Use of external data
2) Margins
3) Use of ILFs or exposure curves
4) Qualitative methods
186
Lis the situations in which qualitative methods are appropriate for pricing
1) Where risk perception influences determination of the price
2) Where quantitative data is...
- incomplete
- inaccurate
- sparse
187
List the ways in which data must be adjusted and trended
1) Adjusting base values for trends in claim experience
2) Adjusting for change in risk
3) Adjusting for change in cover provided
4) Adjusting for environmental changes
5) Adjusting for inflation
6) Developing claims to ultimate
188
List the STEPS in adjusting data for inflation
Adjust both exposure data and claims data.
1) Inflate base values to the present day using (broadly) known past inflation rates
2) Project from the present day to the future using estimated future inflation rates
189
What factors may influence a policyholder when deciding whether or not to renew their contract?
1) Premium
2) Level of service
3) Reputation of the company
4) Loyalty discounts
5) Advertising campaigns
6) Ability of insurer to pay claims
7) Willingness/reluctantance of insurer to pay claims
8) Inertia/convenience
9) Payment method
190
New rating structures may be based on...
1) Subjective views
2) Detailed analysis
191
The choice of rating factors is constrained by...
1) Those used in the market
2) The reliability of data to support alternative rating factors
3) Legislation
192
List the features of a good rating factor
1) Define the risk clearly
2) Not correlate too closely with other factors
3) Be practical to obtain and record
4) Be objective
5) Be verifiable and factual
6) Be acceptable to the policyholder
7) Be non-manipulable
8) Be acceptable to the market
9) Be allowed by the regulator
193
Why might the actual office premium chharged differ from the theoretical office premium?
1) To meet business objectives
2) To maintain market share in highly competitive markets or in certain market conditions
3) If it is difficult to establish the technical premium
4) If the insurer can charge certain loyal customers more (inertia pricing)
5) If the market does not accept different premiums for new business and renewals
6) Where NCDs apply
194
Profit optimization involves finding the optimum balance between...
1) The number of policies sold
2) The profit per policy
195
List other practical considerations affecting premium rates
1) Capital availability
2) Reinsurance capacity
3) Sales and quote systems
4) Regulations
5) Relationships with sellers
6) The method of sale
196
List the different ways that experience rating can be applied
1) Prospectively vs retrospectively
2) Using claim numbers
3) Using claim numbers and claim amounts
197
List the methods that can be used to calculate a risk premium
1) The burning cost approach
2) The frequency-severity approach
3) Multivariate models
- minimum bias methods
- GLMs
- generalised non-linear models
- generalised additive models
4) Original loss curves
- first loss scales/ exposure curves/ loss elimination functions
- excess of loss scales
- increased limit factors
198
Advantages of the burning cost approach to pricing
1) Simplicity
2) Needs relatively little data
3) Quicker to perform than other methods
4) Allows for experience of individual risks or of portfolios of risks
199
Disadvantages of the burning cost approach to pricing
1) Harder to spot trends
2) Difficult to adjust trends
3) Difficult to adjust for changes in cover, deductibles etc as we often lack individual claims data
4) An be a very crude approch
200
Advantages of the frequency-severity approach to pricing
1) Mirrors the underlying process
2) Allows complex structures to be modelled more easily
3) Generates distributions which can be used in capital modelling
4) Provides a better understanding of the data
5) Enables frequency and severity trends to be identified separately
6) More accurate than the burning cost approach
201
Disadvantages of the frequency-severity approach to pricing
1) Requires more data (by volume and detail)
2) Is more time-consuming
3) Is more complex, so requires expertise
202
Causes of trends in claim frequency include...
1) Changes in accident frequency
2) Changes in propensity to claim
3) Changes in the social and economic environments
4) Changes in legislation
5) Changes in the structure of risk
203
List the different types of deductibles and limits applicable to claims data
1) Deductibles:
- aggregate
- ranking
- non-ranking
- trailing
2) Limits
- per-occurrence
- annual aggregate
204
List common methods used by fitting algorithms
1) Maximum likelihood estimation
2) Method of least squares
3) Method of moments
205
List common techniques to check goodness of fit to data
1) Chi-squared statistic
2) Kolmogorov-Smirnov statistic
3) Anderson-Darling statistic
206
Multivariate models may be used to model...
1) Claim frequencies
2) Average claim amounts
3) Aggregate claim amounts
4) Propensity to claim
207
Appproaches to classification include
1) Spatial smoothing techniques
- distance-based
- adjacency-based
2) Vehicle classification techniques
3) Decision trees and CHAID
208
Other considerations when using a GLM to price
1) Choosing the factors to include in the model
2) Analysis of significance of factors
3) Measuring uncertainty in model estimators
4) Comparisons with time
5) Consistency checks with other factors
6) Restrictions on the use of factors in the model
7) Correlations between predictor variables
8) Parameter smoothing
209
Advantages of GLMs in pricing
1) Can be very granular
2) Useful where there are many rating factors
210
Disadvantages of GLMs in pricing
1) Require expertise
2) Lots of things to consider
211
List the sources of heterogeneity that are highly likely to alter the distribution of relative loss
1) Peril
2) Size of risk
3) Different coverages
4) Different sub-classes
5) Differences in jurisdiction and claims environment
212
List the considerations when choosing a table of ILFs
1) Jurisdiction
2) Nature of coverage
3) Treatment of ALAE in the coverage offered
4) Treatment of ULAE
5) Loadings for risk
6) Nature of the limits offered
7) Effects of trends and LT changes in claims environment
213
When using exposure curves, we may need to adjust for...
1) The heterogeneity of the underlying business
2) The effect of claima inflation
214
List the assumptions made when applying original loss curves to liability business
1) The ground-up loss frequency is independent of the limit purchased
2) The ground-up severity is independent of the number of losses and of the limit purchased
215
Advantages of using original loss curves in pricing
1) Relatively simple to implement
2) Easy to explain
3) Provide internally-consistent loss costs
4) Can be used where there is little or no credible data
216
Disadvantages of using original loss curves in pricing
1) Application is difficult in practice (often due to uncertainty in estimating or selecting the appropriate curves)
217
STEPS in the process of reinsurance pricing using a burning cost calulation
1) Trends the claims data
2) Aggregate by year to give triangles of paid/incurred losses
3) Develop to ultimate, using benchmarks if necessary
5) Adjust exposure for past rate and exposure changes
6) Divide losses by exposure to get burning cost
218
STEPS in the process of reinsurance pricing using a frequency-severity calculation
1) Trend individual losses
2) Fit distributions to the frequency and severity data
3) Combine frequency and severity projections to produce a stochastic model for a cedant's large losses
219
STEPS in the process of reinsurance pricing for a quota share contract
1) Adjust claims for inflation and premiums for rate/exposure changes
2) Use triangulations to get ultimate historic loss ratios
3) Decide on an estimated loss ratio for the period in question
4) Calculate a suitable commission, bearing in mind other outgo
5) Use a stochastic model if the is a a profit commission or sliding scale commission
220
List the factors upon which the risk appetite of the insurer will depend
1) Assets
- size
- expected LT return from various asset classes
- existing asset portfolio
- non-investible funds
- economic outlook
2) Liabilities
- currency
- uncertainty
- nature
- term
- discounted or not
- estimated future liabilities arising from new business planned
3) External influences
- tax
- restrictions
- statutory valuation requirements
- rating agency constraints on capital requirements
- competition
- regulatory constraints
4) Insurer-specific constraints
- risk-appetite
- investment objectives
221
Give examples of non-investible funds
Those monies held by:
- agents
- policyholders
- reinsurers
222
List the three cashflow positions in which an insurer may find itself
1) Ongoing
2) Run-off
3) Post-catastrophe
223
List the components of total gross claim payments
1) All future payments in respect of unsettled reported claims
2) IBNR claims
3) Claims that will emerge from unexpired risks
4) Claims that will emerge from new business
224
List the risks an insurer is subject to in relation to its investment strategy
1) Market
2) Credit
3) Economic
4) Liquidity
5) Currency
6) Group
225
STEPS in using an ALM to determine investment strategy
1) Project the liability outgo in each future time period for a chosen time frame
2) Project asset proceeds (consistently with liability outgo) in each future period
3) Compare projectes assets and liabilities for each future period
4) Decide whether the asset proceeds are appropriate for the liability outgo
5) If not, investigate alternative distributions
226
List the considerations upon which the level of economic capital will depend
1) The risk profile of the individual assets and liabilities in the insurer's portfolio
2) The correlations of the risks faced
3) The desired level of credit deterioration the provider wishea to be able to withstand
227
List the three main features that characterise a capital model
1) Risk profile
2) Risk measure
3) Risk tolerance
228
List potential financial outcomes that may be used as measures of success or failure
1) Profit/Loss
2) Net cashflows over a selected time horizon
3) Balance sheet position at the end of a selected time horizon
229
List the major risks faced by an insurer in relation to its caahflows
1) Market risk
2) Credit risk
- investment credit risk
- counterparty credit risk
3) Liquidity risk
4) Operational risk
5) Insurance risk
- underwriting risk
- reserving risk
6) Group risk
230
Insurance risk may also be affected by...
1) The underwriting cycle
2) Parameter error
3) Multi-year policies
4) Management actions
5) Reinsurance terms in future years
231
Market risk may be split into...
1) The consequences of changes in asset values
2) The consequences of changes in liability values
3) The consequences of not matching asset and liability cashflows
232
List the factors to consider when modelling marketing risk
1) Changes in market values of assets
2) Changes in interest rates that will result in changes to asset values
3) Level of investment income
4) Currency movements
5) Severe economic or market upturn/downturn leading to adverse interest rate movements and/or equity market falls
233
List the types of correlation to allow for when aggregating capital requirements
1) Between underwriting classes
2) Between risk types
3) Between successive years
4) Between legal entities within a group
234
We might be interested in the capital requirements of...
1) A single policy
2) A particular product
3) A class of business
4) An insurer's whole portfolio
235
It is necessary to allocate capital in order to...
1) Measures performance
2) Plan business strategy
3) Pricing
236
List the four methods that can be used to allocate total capital required
PPMS
Percentile methdo
Proportions method
Marginal method
Shapley method
237
List reasons why insurers will often hold more capital than the minimum specified by their regulators
1) To demonstrate financial strength
2) To increase business volumes by providing a high degree of confidence that it can meet its obligations to policyholders
3) To benefit from cheaper financing terms
4) To improve its standing in the market in the eyes of investment analysts
5) To reduce the risk of having to call on shareholders or members for further finance if losses are greater than expected
6) To smooth dividends to shareholders who prefer less volatile returns
7) To meet the requirements of other stakeholders whose interests may be subordinated to those of policyholders
8) To enable it to develop the business
9) To enable it to undertake a more aggressive investment strategy
10) To manage unexpected cashflow mismatches
11) To reduce the risk that the available capital falls below the regulatory requirement
12) To maintain its credit rating
238
List the two main reasons that data is required in a capital model
1) To create the model of the business as at the run date
2) As inputs to selecting assumptions
239
List the main items of data required for capital modelling
1) Unexpired premiums (gross and net), split by class of business
2) Planned premiums (gross and net), split by class of business
3) Gross unpaid premiums, split by class of business
4) Claima payment profiles
5) Claim limits
6) Future reinsurance costs
7) Reinsurance programmes for:
- gross unpaid claims
- unexpired business
- planned reinsurance programmes
8) Expenses
9) Asset values
10) Details of risks e.g.
- credit exposures
- operational risks
240
List the assumptions that must be set
1) Gross written premium
2) Ceded premium
3) Ultimate gross claims (including claims management costs)
4) Catastrophe claims
5) Claims payment profiles
6) Grosa reserve movements, split by class of business
7) Reinsurers' share of gross ultimate claims and the proportion of this that the firm may be unable to recover
8) Reinsurance exhaustion and reinsurer downgrade assumptions
9) Expenses
10) Inflation
11) Investment returns, split by asset class
12) Operational losses
13) Tax
14) Dividends
15) Correlation assumptions
241
List the disadvantages of regulation
BICEP Muscle Really Flaccid
Barriers to entry
Investment return reduces
Compliance costs
Economies of scale reduced
Passing higher costs on to clients
Monitoring costs
Reduced provision of insurance to some sectors of the market
Fewer business opportunities
