Loss-Sensitive Rating Plans Flashcards

1
Q

Advantages to insured, LSRPs

A

Incentive for loss control

Immediate reflection of good experience

Cash flow benefits

Reduction in premium taxes

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2
Q

Disadvantages to insured, LSRPs

A

Uncertain costs

Immediate reflection of bad experience

Impact on future financial statements

Ongoing administrative costs

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3
Q

Advantage for insurer, LSRPs

A

Insured incentive for loss control

Less capital required to write policies

Ability to write otherwise unacceptable policies

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4
Q

Disadvantages to insurer, LSRPs

A

Credit risk of insured

Reduction in cash flow

Tendency for insured to second guess (profit provision, handling of claims)

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5
Q

General retrospective premium formula

A

P = (B + cL)T

Losses are as of 18, 30, or 42 months

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6
Q

Components of retro premium formula

A

B = basic premium; reflects fixed charges

c = loss conversion factor; reflects variable expenses

T = tax multiplier = 1 / (1 - tax rate)

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7
Q

Balance principle

A

Retro premium = E[Guaranteed Cost premium]

Flawed because the transfer of risk and amount of required capital is different between the two plans

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8
Q

LRARO

A

Large Risk Alternative Rating Option

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9
Q

Common features of LRARO

A

Rating based on mutual agreement as insureds are knowledgeable and sophisticated

Can use losses on paid basis

Max/min ratable losses agreed upon

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10
Q

Why LDD plan can be priced similarly to retro plan

A

Deductible ~ per-occurrence ratable loss limit

Aggregate limit ~ aggregate ratable loss limit

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11
Q

Main differences between SIR and a large deductible plan

A

Regulator approval required for WC and auto

Insured responsible for adjusting/paying claims

Insurer does not inherit credit risk

Policy limit not eroded by SIR

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12
Q

Dividend plan

A

Dividends are paid if insured’s losses are lower than expected

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13
Q

Clash coverage

A

If multiple LOBs and policies impacted, clash deductible < sum (individual deductibles)

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14
Q

Basket aggregate coverage

A

Cap insured aggregate reimbursable or ratable losses across multiple LSRPs at a single aggregate retention, up to a specified limit.

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15
Q

Adjustments needed on a multi-year plan

A

Allow for exposures to change over term

Loss trends must be built in

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16
Q

Captive reinsurer

A

Insurer serves parent company and writes policies and cedes losses to captive

17
Q

Ways insurers can protect themselves from credit risk

A

Require security (collateral of some sort)

Loss Development Factors to use in premium calculation

Holdbacks (delay premium adjustments until later maturity)

18
Q

Four considerations when deciding upon retention levels

A

Insured keeps predictable (working layer) of losses

Be within insured’s risk tolerance

Reflect insured’s financial capacity

Should increase with loss trend

19
Q

Compare profit provision on LSRP to traditional policies

A

Capital is not reduced in proportion to loss sharing – profit provision becomes higher % of insured loss

20
Q

Dissolutions of LSRPs

A

Closeouts – apply LDFs to determine final premium

LPT/Buyout - insurer assumes liabilities in deductible layer

SIRs often dissolved by LPT/Buyout

21
Q

Costs included in Basic Premium

A

Profit/UW not included in T

Expected per-occurrence excess losses if a per-occurrence ratable limit is selected

Expected aggregate excess loses if aggregate ratable limit selected (insurance charge)

Credit if minimum aggregate ratable loss amounts are selected (insurance savings)