Overview of Insurance Terminology

Question 1

Ideal Properties of an Exposure Base

Answer 1

1. Directly Proportional to Expected Loss
2. Practical
   
   • Objective
   • Verifiable and Difficult to Manipulate
   • Inexpensive to Obtain
3. Historical Precedence
4. Not against the Law

Question 2

Valuation Date

Answer 2

The latest point in time that the data reflects

Question 3

Paid Loss

Answer 3

Represents dollars that have already went out the door

Question 4

Case Reserve/Case Outstanding

Answer 4

Claim handler’s best estimate on the losses the insurer will pay in the future on a claim

Question 5

Allocated Loss Adjustment Expense (ALAE)

Answer 5

Include legal defense costs and cost containment. Expenses that can be tied to a specific claim

Question 6

Unallocated Loss Adjustment Expense (ULAE)

Answer 6

Includes things like claim adjuster salaries, payroll, and rent. Expenses that cannot be easily tied to a specific claim

Question 7

Salvage

Answer 7

When an insurer pays an insured for a claim considered to be a total loss, the insurer acquires rights to the damaged property. This is the amount the insurer is able to collect from the sale of damaged property

Question 8

Subrogation

Answer 8

Refers to an insurer’s right to recover the amount of claim payment to a covered insured from a third party responsible for the injury or damage

Question 9

Reinsurance

Answer 9

The insurance purchased by primary insurance companies to transfer some of the financial risk they face

Question 10

Proportional Reinsurance

Answer 10

The same proportion of losses and premium are transferred (“ceded”) to the reinsurer

Question 11

Non-proportional Reinsurance

Answer 11

The reinsurer agrees to assume some of the predefined portions of the losses

Question 12

Frequency

Answer 12

Measure of the rate at which claims occur. Number of claims/number of exposures

Question 13

Severity

Answer 13

Measure of the average cost of claims. Calculated as the Losses/Number of Claims

Question 14

Pure Premium

Answer 14

Measure of the average loss per exposure. This is the losses/number of exposures. Also known as the frequency * severity

Question 15

Average Premium

Answer 15

Premium/Number of Exposures

Question 16

Loss Ratio

Answer 16

Losses/Premium

Question 17

LAE Ratio

Answer 17

Loss Adjustment Expenses/Losses

Question 18

Average Case Outstanding

Answer 18

Measures case reserve adequacy. Calculated as Total Case Outstanding/Number of Open Claims.