NCCI Retro Flashcards
retro plan is _ unlike experience rating
optional
with eligibility based on standard premium
eligibility
25k in estimated standard premium for 1 year plan
75k in estimated 3yr standard premium for 3 year plan
1M in estimated annual standard premium for large risk alternative rating option
-risk can satisfy these eligibly requirements by combining premiums for other casualty LOBs and use plan on combined basis
each insured will mutually agree with their insurer on some of terms of plan
Whether ratable loss will be loss only
Amount of LCF
Max and min premium factors
Whether per-occurrence limit will apply to ratable losses
Whether plan will use estimated ultimate losses for 1st 3 retro premium adjustments instead of incurred loss
basic premium covers
profit, charge for having min and max premiums, all non-LAE expenses except for taxes
B=bP
-b is initially set at inception but is finalized after audit and can change from initial value if audited payroll differs greatly from estimated payroll
retro development factor
V is optional component and is used to stabilize premium adjustments
insured would like to improve their cash flow position. What
is recommend to insurance program at renewal?
- Do not stabilize premium adjustments with the retrospective development factor. Since losses are initially low, this will lower premiums at early maturities.
- Opting for a large deductible will lower the premium.
- Raising the per occurrence limit will lower the Excess Loss Factor, reducing the premium.
- Raising the maximum premium will lower the insurance charge, which will reduce the premium.
- Raising the minimum premium will lower the insurance charge, which will reduce the premium.
Explain why the Table of Insurance Charges in the NCCI Retrospective Rating Plan Manual for Workers Compensation and Employers Liability Insurance varies by expected loss group.
Since there is more variance in the loss ratio distribution for smaller insureds than for larger insureds, there will be more variance in the entry ratio distribution as well. As such, the tables in the NCCI manual reflect different columns for different insured sizes. Using a single distribution for all insureds would result in overcharging the large insureds and undercharging the small insureds.
reason an insurance company would include retrospective development factors in
a policy
Since losses develop over time, without a retrospective development factor, usually losses will be lower at early adjustments, which will cause refunds to the insured. Once losses develop higher, the insured will have to pay the money back. Using a retrospective development factor will reduce the back-and-forth payments, reduce the credit risk of collecting future premiums, and allow the insurer to have more premium at early adjustments to use in earning additional investment income.
why the ICRLL procedure produces reasonably accurate insurance charges.
The presence of a per occurrence limit (in addition to an aggregate limit) reduces the variance in entry ratios for a group of risks of a given size that are used to construct a (Limited) Table M. As such, the (Limited) Table M curve will be flatter than without the per occurrence limit, and the insurance charges for a given entry ratio will be smaller. Using a regular Table M without adjustment would result in an overlap with the charge for the per occurrence limit.
This reduction in the variance of entry ratios is also what happens for groups of larger risk sizes, since the law of large numbers gives their loss ratios more stability. As such, the ICRLL procedure uses the Table M curve for a group of larger risks to approximate the use of a Limited Table M curve.
insured’s risk manager believes the retrospective premium can be reduced by selecting a higher per occurrence limit because the insured will assume a greater portion of the losses. Evaluate the risk manager’s assertion.
If the occurrence limit is higher, the excess loss factor goes down but the actual limited losses will be higher. In a balanced plan, these two will offset perfectly, and the expected retro premium (equal to the guaranteed cost premium) will remain unchanged.
Fully discuss the purpose of the Insurance Charge Reflecting Loss Limitation (ICRLL) procedure in the NCCI Retrospective Rating Plan
The presence of an occurrence limit reduces the variance of the limited aggregate loss distribution compared to that of the unlimited aggregate loss distribution, which is the same thing that occurs as we move to larger (more stable) risk sizes. The ICRLL procedure approximates the impact of an occurrence limit on the aggregate distribution by adjusting the expected losses for a risk by a factor to increase the expected losses to a risk size that would have similar variance in the aggregate distribution as the original risk size with an occurrence limit applied
Fully discuss the purpose of the State Hazard Group Differential in the NCCI Retrospective Rating plan
The State HG Differential accounts for the fact that some states and hazard groups are riskier (i.e., more variance in aggregate losses) than others even for the same risk size. By multiplying the expected losses for a risk by the State HG Differential prior to determining which aggregate distribution to use in pricing the risk, we adjust the expected losses for a risk to match those of a risk with a different size but similar variance in their aggregate loss distribution
