Misc Non-Calculation Flashcards
Retrospectively Rated / Loss-Sensitive Contract
Facts, premium adjustment
- Contract where final premium is based on the loss experience of the policy period AND the loss development after expiration
- Final premium is determined by a formula written in the policy or by law
Premium adjustments for Loss-Sensitive Contracts
- Considered admitted assets with exceptions (ex. amount deemed uncollectible)
- remember admitted assets tend to be liquid, non-admited like illiquid/furniture
Estimating Retrospective Premium Adjustment
2 ways
2 ways:
1. Apple historical ratio of (retrospective developments) / (EP) to the premium
2. For each risk, compare known anticipated loss development (including IBNR) to estimate premium return or additional premium earned
Accounting Treatments of Additional/Return Premium
Additional Retrospective Premium
- Recorded as a receivable
- Corresponding entry in WP or adjustment in EP
Return Retrospective Premium
- Record as a liability (change in UEP)
- Corresponding entry in WP or adjustment in EP
Financial Statemetn Disclosures of Retrospectively Rated Contracts
- method used to estimate premium adjustment
- whether the premium adjustment had a entry in WP or adjustment in EP (accounting treatment)
- amount and % of net premiums subject to retrospective adjustments
- calculation of non-admitted (ex. uncollectible) retrospective premium
Arguments For/Against Credit Scores
For:
- Statistical significance – highly predictive of claim costs
- Manipulation – credit scores calculated by 3rd party, hard for insureds to manipulate
- Objective – credit scores are based on numerical data
- Removal – removing credit score won’t change aggregate premiums, given a off-balance factor is applied
Against:
- Frequency – credit scores correlated with frequency but not severity
- Errors – credit reports have errors, sometimes due to identity theft
- Economic downturns may have different credit impact on vulnerable populations
- Discriminatory – credit scores may lead to rates being unfairly discriminatory
Why Credit Score Unfairly Discriminatory?
- Age: younger people don’t have long credit history, elderly people use credit often
- Poor families: may use cash more than credit
- Recent immigrants: may not have access to credit
- Moral/religious beliefs: some beliefs may discourage use of credit
Economic Downturns Concerns Regarding Credit Score
- Unjustified increase in aggregate premiums if average credit score got worse
- Can apply off-balance factor to keep the aggregate premium unchanged
- Distributional shift in individual premium that don’t reflect true cost differences
- We can stop using credit score temporarily and redo the classification analysis after the economy has stabilized
FInancial Strength Rating Agencies and Why Need Them
Rating Agencies:
- AM Best – most experience with financial strength ratings of insurers
- Moody’s – focuses more on debt ratings (vs overall financial strength ratings)
- S&P – focuses more on debt ratings (vs overall financial strength ratings)
For policyholders:
- Financial strength helps buyers access an insurer’s ability to pay claims
- For insurers seeking reinsurance, the insurer may require the reinsurer to have high rating
For P&C insurers
- High rating can help get more business
- Ratings can uncover potential solvency issues without involving a regulator
Shortcomings of Rating Agencies
Conflict of interest
- rating agencies are paid by the companies they rate
History of Unreliability
- rating agencies have given high ratings to companies that then went bankrupt
Interactive Rating Process & Drawbacks
Process
1. Research - by rating analysts (insurer submits proprietary info)
2. Meeting - between rating analysts & insurer’s senior management for presentation
3. Proposal - the lead rating analyst proposes a rating (insurer may submit more info)
4. Decision - by rating committee
5. Publication - to public and fee-paying subscribers
Drawbacks
- Time comsuming - requires extensive meetings with senior management
- Intrusive - insurer must provide detailed operational info
- Expensive - insurer must pay rating agencies
If Insurer’s Financial Strength Changed Materially
Rating agencies
- Upgrade or downgrade rating
- Change the outlook (instead of upgrade/downgrade)
- Rather not incorrectly upgrade/downgrade and risk losing credibility
- Rating agencies heitate to change ratings too quickly to avoid angry paying clients and to maintain consistency & reputation
Rating Agencies Capital Models vs Risk Based Capital (RBC)
Data:
- Rating agencies uses confidential company data
- RBC uses public data
Method
- Rating agencies include qualitative information (interactive ratings)
- RBC is a quantitative formula
Intervention
- RBC can trigger regulatory intervention
- Rating agencies don’t trigger regulatory intervention
Usage-Based Insurance and Telematics
Usage-Based Insurance (UBI)
- Auto insurance based on how much a car is driven, where it’s driven and how its driven
- How = speeding, acceleration, hard-braking, cellphone use
- UBI often implemented using telematics (can be device plugged into car)
- Telematics device send real time information to insurer about how far, where, how
- Rated based on this information
Benefits Related to UBI to Consumers/Insurers/Society
Consumers
- Availbility - insurer can price and manage risk more accurately –> may accept more risk and write more policies
- Affordability - UBI is better at identifying good drivers –> lower rates for good drivers
- Telematics can provide real time feedback to driving habits
- All drivers can improve driving habits and get lower rate
Insurers
- Identify and retain low risk drivers and
- Identify high risk drivers and price more accurately or provide feedback so they can improve driving habit
Society
- Less discriminatory rating –> rates are based on how you drive rather than age, sex, marital
- Encourages less driving –> less accidents pollution, congestion/traffic
UBI Concerns
- Will data be credible? Especially at early stages of adoption
- Telematics devices can be hacked
- Cost of telematic devices can be expensive for low income drivers
- Will personal data be secure? (not sold to 3rd parties)
- Will insureds understand how their personal data is used (transparency)
- Is there adequate regulatory oversight for UBI?
