Quizlet Flashcards

Question

a deviance

Answer 1

a single figure measure of how much the fitted values differ from the observations

Answer 2

a data mining technique to reduce the number of parameter estimates in a classification analysis. This can imply a reduction in the number of variables or a reduction in the levels within a variable.

Answer 3

Data mining technique that seeks to combine small groups of similar risks into larger homogeneous categories or "clusters."

Answer 4

when rating for geography

Answer 5

1. whittling down a long list of potential explanatory variables to a more manageable list 2. providing guidance in how to categorize discrete variables 3. reducing the dimension of multi-level discrete variables

Answer 6

gathers test data and invokes training algorithms designed to automatically learn the structure of the data. This technique has been described as a recursion applied to a GLM. *Its a data mining tehnique

Answer 7

geography tends to be highly correlated with other rating factors, and the data in each individual territory may be sparse

Answer 8

a challenge for territorial ratemaking in which data in individual territories is sparse

Answer 9

1. establishing territorial boundaries 2. determining rate relativities for the territories

Answer 10

determining the basic geographic unit

Answer 11

estimate the geographic risk of the territory by isolating the geographic symbol in the data

Answer 12

since geographic risk tends to be similar for units in close proximity, smoothing improves the estimate of any individual unit by using information from nearby units

Answer 13

1. distance-based 2. adjacency based

Answer 14

weighting the information from one geographic unit with the information from all nearby geographic units based on the distance from the primary unit and some measure of credibility

Answer 15

easy to understand and implement

Answer 16

the assumption that a certain distance has the same impact on similarity of risk regardless of whether it is an urban or rural area. Additionally, the presence of a natural or artificial boundary between two geographic units is not taken into consideration

Answer 17

weights the information from one geographic unit with the information estimators of rings of adjacent units

Answer 18

it handles urban/rural differences more appropriately, and accounts for natural or artificial boundaries better than the distance-based smoothing

Answer 19

perils driven heavily by socio-demographic characteristics

Answer 20

the actuary may be masking the real spatial variation among the risks

Answer 21

the actuary may be leaving considerable noise in the estimator

Answer 22

minimize within territory heterogeneity and maximize between territory heterogeneity

Answer 23

creates boundaries that lead to the smallest within cluster sum of squares difference. This tends to produce clusters that have the same number of observations.

Answer 24

LAS(H) = integral from 0 to H of(x*f(x)) plus H * the integral from H to infinity of(f(x))

Answer 25

LAS(H)/LAS(B)

Answer 26

the rate by which losses and expenses are reduced as a result of an increase in deductible

Answer 27

the all variable approach

Answer 28

the insurer may require a minimum insurance to value or else payment on covered losses will be reduced proportionately by the amount of underinsurance

Answer 29

the relationship between the amount of insurance selected and the coinsurance requirement and is the factor applied to the loss amount to calculate the indemnity payment

Answer 30

coinsurance apportionment ratio: a = face value of policy/(coinsurance percentage * value of property)

Answer 31

the amount by which the indemnity payment is reduced by the application of the coinsurance clause

Answer 32

1. A non-zero loss has occurred (i.e., L > 0). 2. The face amount of insurance is less than the coinsurance requirement (i.e., F < cV). 3. The loss is less than the coinsurance requirement (i.e., L < cV).

Answer 33

a policy feature that allows replacement cost to exceed the policy limit if the property is 100% insured to value and, in some cases, subject to annual indexation.

Answer 34

estimate=(z*observed experience)+((1-z)*related experience)

Answer 35

estimate=(z*observed experience)+((1-z)*prior mean). where z = least squares version

Answer 36

N/(N+(E(Var(x))/Var(E(x))

Answer 37

the phase of the underwriting cycle that sees higher price levels and increased profitability

Answer 38

the portion of the total premium that varies by risk characteristics

Answer 39

the portion of premium that is derived from expense fees or other dollar additives

Answer 40

FE/(1-V-Q)

Answer 41

Bp = Bc x (Pp-Ap)/(Pc-Ac)

Answer 42

Proposed base rate = (proposed average premium - proposed additive fees) / proposed average rating factor

Answer 43

1/(1+% change in average rate differential)

Answer 44

multiply the base rate by the offset factor = (prem without min)/(prem with min)

Answer 45

dictates the minimum or maximum amount that a premium can change for a single insured in one renewal

Answer 46

occurs when there is an increase in the underlying risky behavior causing the loss

Answer 47

occurs when an individual asks the insurer to pay for more of the negative consequences than would have otherwise been the case

Answer 48

1. calendar year exposures 2. policy year exposures

Answer 49

calendar year exposures

Answer 50

1. experience rating 2. schedule rating

Answer 51

to the first layer of insurance coverage. Primary insurance pays compensation in the event of claims arising out of an insured event ahead of any other insurance coverages that the policyholder may have

Answer 52

typically refers to liability types of coverage available to individuals and companies protecting them against claims above and beyond the amounts covered by primary insurance policies or in some circumstances for claims not covered by the primary policies.

Answer 53

1. case outstanding 2. provision for future development on known claims 3. estimate for reopened claims 4. provision for claims incurred but not reported 5. provision for claims in transit (incurred and reported but not recorded)

Answer 54

Third Party claims Administrators who handle claims from beginning to end.

Answer 55

Hired by insurance companies to handle specific claims for which the insurer does not have expertise

Answer 56

whether or not the claim is covered under the terms of a valid policy

Answer 57

Set up an initial case outstanding

Answer 58

the estimated future payments on a claim at any specific point in time. This includes all expenses

Answer 59

When exposure info is unavailable

Answer 60

When pricing a new line of business because it requires current rate

Answer 61

factor=(Latest period AWP @ CRL)/(Avg EP @ CRL)

Answer 62

(average written date during the period the proposed rates are expected to be in effect) - (average written date of the latest period of awp data)

Answer 63

factor=(1+%trend)^(Premium trend length)

Answer 64

when the subject experience and the related experience have significantly different distributions

Answer 65

C=La*(ILF(x+a)-ILFa)/(ILFa). where La=the losses capped at attachment point a (avg Pure premium capped at a). ILFx+a is the increased limit factor of the excess layer (upper boundary)

Answer 66

to adjust losses that are capped at an attachment point to produce an estimate of losses in a specific excess layer

Answer 67

C=Ld*(ILF(x+a)-ILFa)/(ILFd). Where Ld=losses capped at some lower limit d

Answer 68

If the losses capped at the attachment point are too sparse

Answer 69

C=LR*Sum[Pd*(ILF(min(d,a+x))-ILF(a))/ILF(d)]. where Pd=Total premiums for policies within limit d. The sum is for all limits d above a.

Answer 70

C=Loss cost for class x * (1+indicated rate change for larger group). Cred weight loss costs then calculate the indication.

Answer 71

adjusting development triangles for changes in claim settlement rates or case reserve adequacy

Answer 72

changes in disposal rates are due to speedups or slowdowns in claim settlement rates and not due to changes in the rate of reporting of claims or changes in prioritization between small and large claims

Answer 73

adjusting development triangles for changes in claim settlement rates

Answer 74

adjusting development triangles for changes in case reserve adequacy

Answer 75

Any differences between the annual changes in average case reserves at each maturity and the severity trend are due to changes in case reserve adequacy and NOT due to large unpaid losses

Answer 76

Reported Berquist Sherman Technique

Answer 77

closed claims/projected ultimate claims

Answer 78

Let X=Paid losses, D=Disposal Rate, N=Next Collumn, S=Selected, T=This Collumn, P=Previous Collumn. Adding: XT+(XN-XT)x[(DST-DT)/(DN-DT)]. Subtracting: XP+(XT-XP)x[(DST-DP)/(DT-DP)]

Answer 79

If the trend in average outstanding case reserve is different from the trend in average paid severity

Answer 80

Detrend the average case outstanding triangle for the severity trend and multiply by open claims, then add paid losses.

Answer 81

you need to calculate the adjusted open claim counts as the reported claim clounts minus the adjusted cumulative closed claim counts (calculated using the selected disposal rates). Then the incurred loss triangle will be (adj open claim counts*adj avg case reserve)+adjusted cum. paid losses

Answer 82

link ratio method or Development method

Answer 83

When entering a new line of business with insufficient data. When operational or environmental changes make historical data irrelevent. Or when estimating ultimates at early maturities for long tailed lines of business where the early age-to-ultimate factors are highly leveraged.

Answer 84

Ultimate for AY= expected claim ratio * earned premium for AY. (- OR -) Ultimate for AY = expected pure premium * earned exposures for AY.

Answer 85

The "development" method (Link Ratio) and the expected claims ratio. Z = (1/CDF)

Answer 86

credibility weighted average of "development technique and BF method. Z = (1/CDF)

Answer 87

Ultimate = actual reported losses + On level earned premium * Expected Claim Ratio * % Unreported. Where Expected Claim ratio is: sum(trended reported losses for relevant AYs)/(sum(on level earned premium * % reported)) The denominator of that expected claim ratio is called the used up premium

Answer 88

e = min(cV,Loss)-min((cV),(Loss)x(a)). a = coinsurance apportionment ratio

Answer 89

new terr base rate = (Loss ratio relativity x territory credibility x base rate) / [weighted avg of (cred x Loss ratio relativity)]

Answer 90

CD = [(AER-EER)/(EER)] x Z. AER = Actual experience ratio. EER = Expected experience ratio. Z = credibility. AER = Experience Ultimate / Company subject basic limit loss.

Answer 91

estimated premium / trended exposures

Answer 92

a retrospective rating plan uses the insured's actual experience during the policy period as the basis for determining the premium for that same period.

Answer 93

retro premium = [Basic premium + (reported losses x loss conversion factor)] x Tax multiplier. Where the retro premium is subject to a minimum and maximum

Answer 94

basic premium = [expense allowance - expected loss ratio x (loss conversion factor - 1) + Net insurance charge] x Standard Premium

Answer 95

net insurance charge = [insurance charge - insurance savings] x Expected Loss Ratio x Loss conversion factor

Answer 96

min prem = minimum retrospective premium ratio x standard premium

Answer 97

multiply latest avg written @ CRL by earned exposures for each experience year and then apply the premium trend factor

Answer 98

just so you know (jsyk)

Answer 99

find average ulae/(loss+ALAE) for the experience years and apply a multiplicative factor to (loss+ALAE) of each experience year

Answer 100

residual indication = (1+latest indication)/(1+latest rate change taken)

Answer 101

(1+residual indication) x (1+net trend)^(# of years between *requested* effective date last rate change and current proposed effective date)

Answer 102

(Straight Average of cat loss to AIY ratio of every year given) x (1+ULAE/(Loss & ALAE))

Answer 103

(1+freq)x(1+sev)

Answer 104

yes, you have to do both

Answer 105

THING: progression of age-to-age factors across dev periods. WHY: the pattern should be decreasing. THING: Stability of age-to-age factors for the same development period. WHY: Greatest variability in age-to-age factors is at earlier ages. THING: Low credibility of experience WHY: low claims volume, or organizational changes THING: Changes in patterns WHY: May suggest changes in internal ops or external environment THING: Applicability of historical experience WHY: Obvious

Answer 106

when the company has case outstanding adequacy changes because the LDFs from prior years wil not work for more recent years DO NOT SAY: when looking at a short tailed coverage

Answer 107

widely varying age-to-age development factors for a single collumn, not enough data points, not enough columns used to capture full development

Answer 108

Strong increase in (% increase in average case outstanding) when looking down the collumn of Average Case Outstanding triangle.

Answer 109

1. Set up a. CPC & IPC triangles b. CPL & IPL triangles c. UC values (develop CPC triangle to ult) 2. Use Disposal rates to project counts a. CDR triangle then make selections for each dev period * CDR = CPC / UC b. Project IPC (lower right portion of IPC triangle) = (UC - Closed # t) * (Selected DR t+1 - Selected DR t) / ( 1- Selected DR t) 3. Project Severities a. Trended IPS (Incremental Paid Severity) triangle then make selections Trended IPS = IPL/ IPC x (1+ trend) ^(Trended year - AY) b. Calculate final unpaid amounts for each dev period Unpaid = selected counts from step 2b x selected sev from step 3a ultimate losses = paid + unpaid

Answer 110

1.create a remaining in case ratio triangle where each cell = case outstanding / (case outstanding previous age) 2. use that triangle to select ratios for each age 3. use the selected ratios to fill in the not fully developed years of the case outstanding triangle, where each previously empty cell = (selected ratio) x previous age case outstanding 4. Then create incremental paid on prior case ratio triangle where each cell = (incremental paid loss)/(previous age case outstanding). and make selections for each age 5. Use selected ratios from step 4 to fill in the empty cells of the incremental paid loss triangle where each previously empty cell = (selected paid on prior case ratio) x (case outstanding) 6. ultimate for a year is the sum of the incremental case row

Answer 111

1. You are given reported and paid cdfs. Use them to calculate case outstanding development factor = (Ultimate claims - paid claims)/(reported claims - paid claims) = 1+[(ReptCDF - 1)x(Paid CDF)]/[PaidCDF - ReptCDF]. 2. Unpaid claims for an AY is (latest case outstanding)x(Case outstanding Development factor)

Answer 112

It is costly to change an existing exposure base since it can result in large premium swings for individual insureds

Answer 113

If its a continuous change: adjust historical premiums using a premium trend. If its a one time change: use parallelogram or extension of exposures to adjust

Answer 114

(Earned Exposures for the experience year) x (Latest avg written premium @ Crl)

Answer 115

A direct effect is the direct impact on premium or losses solely due to the law change, not taking into account the human response to a change. For example, if the maximum benefit is increased, losses will automatically go up for any workers whose benefits were previously capped by the maximum. An indirect effect is the impact on premium or losses as a result of a change in human behavior caused by the law change. For example, if the maximum benefit is increased, workers might stay out of work longer or more workers might file claims due to the increased financial incentive. (workers comp example)

Answer 116

losses in XS of cap = (ground up excess losses-(excess claims)x(individual large loss cap)). excess loss factor = [(losses in XS of cap)/(reported losses-loss in XS of cap)] + 1

Answer 117

Adj losses = (reported losses - loss in XS of cap for the year)x(excess loss factor)

Answer 118

You overstate the rate indication after years with shock losses and understate the rate indication after years with no shock losses.

Answer 119

Standard errors: Narrow standard errors around estimates suggest that a variable in the model is statistically significant. Deviance tests (such as Chi-Squared or F tests: These tests are used to compare models with different variables in them. Consistency over time: Estimating parameters on data sets for consecutive time periods allows you see whether the estimates tend to be stable over time. If the results are more stable over time, they tend to be more reliable for future predictions. Validation using a holdout sample: You can split a data set into a modeling data set and a holdout sample. You then build the model using the modeling data set, and use it to predict values in the holdout data set.

Answer 120

LAS((H-B) xs B) = [(Losses in layer)-(# of claims in layer)x(B)+(# of claims above layer)x(H-B)]/(# of claims above B)

Answer 121

LAS(H) = LAS(B)+Pr(X>B)xLAS((H-B)xsB). When Calculating Pr(X>B) dont consider data from losses censored at B.

Answer 122

GLMs do not assume that the frequency is the same across all limits, so the GLM results can reflect adverse or favorable selection. This may produce counter-intuitive results such as expected losses decreasing as limits increase.

Answer 123

policies that require that a claim is reported within the policy period for a payment to be made

Answer 124

1. A claims-made policy should always cost less than an occurrence policy as long as claims costs are increasing 2.If there is a sudden unpredictable change in the underlying trends, the claims-made policy priced based on the prior trend will be closer to the correct price than an occurrence policy based on the prior trend 3. If there is a sudden unexpected shift in the reporting pattern the cost of a mature claims-made policy will be affected relatively little, if at all, relative to the occurrence policy 4. Claims-made policies incur no liability for pure IBNR, so the risk of reserve inadequacy is greatly reduced. 5. The investment income earned from claims made policies is substantially less than under occurance policies

Answer 125

there will be a gap in coverage for claims that occurred during the claims-made policy term but are reported after the claims-made policy expires. To deal with this gap a claim-made insurer can offer tail coverage.

Answer 126

2y CM PP = ((% reported in previous year)+(% reported in this year))*(Previous year CM PP)*(1+loss trend)

Answer 127

=Zx(Experience rating credit/debit). so experience mod=Zx(AER-EER)/(EER)

Answer 128

the Expected claim ratio is estimated from historical data instead of being judgmentally selected. Also random fluctuations at early maturities do not significantly distort estimates

Answer 129

For some lines of business, the historical data triangle may not reach ultimate. The factor that accounts for any additional development beyond that included in the standard loss development method is referred to as a "tail factor."

Answer 130

• Doing a special study that contains more years of data. • Using an industry benchmark tail factor. • Fitting a curve (e.g., exponential decay) to the LDFs and extrapolating the tail factor. • Use reported-to-paid ratios at the latest paid development period. • Judgment (e.g., arbitrarily picking a value like 1.05).

Answer 131

There is generally little relevant data that can be used in the tail. The tail selection is very important because the selection affects all accident years reserve needs, thus has a disproportionate leverage on the total reserve need.

Answer 132

The goal of ratemaking is to assure that the fundamental insurance equation is appropriately balanced.

Answer 133

it is equal to -(fraction of policy unearned) exposures

Answer 134

Each policy written during the calendar year is worth the fraction of the policy that will eventually be earned. You have to know if it will eventually be cancelled mid way through or not.

Answer 135

make the year a parallelogram instead of a square. Then do the areas the same way.

Answer 136

General expense is divided by earned premium to come up with a percentage.

Answer 137

Pure Premium/Loss Ratio = Projected Premium

Answer 138

Fixed expense provision = (calculated percentage)x(Projected Premium)

Answer 139

• It can result in unfair allocations of countrywide ﬁxed expenses by state, since it doesn't recognize that expense levels may vary by state • The existence of economies of scale in a changing book of business will lead to increasing or decreasing future average expenses per exposure.

Answer 140

The answer will be: (pre-existing indication) x (1/(1-expense and profit)) x (1/current deviation) x (1+expected loss cost difference)

Answer 141

• The system should reﬂect expected cost differences. • The system should distinguish among risks on the basis of relevant cost-related factors. • The system should be applied objectively. • The system should be practical and cost-effective. • The system should be acceptable to the public.

Answer 142

i. Territory tends to be highly correlated with other rating variables. This can distort univariate pricing methods. ii. Territories are often set to be such small areas (e.g., zip codes) that the data in each territory may have very limited credibility.

Answer 143

The pure premium rate decreases as the policy face increases. If policyholders are underinsured, this is a problem from the insurer's perspective because if rates are calculated assuming all properties are insured to value, the premium charged will not be adequate to cover expected losses arising from those policies not insured to value.

Answer 144

• The direct impact to premium would be an increase in premium due to larger coverage amounts. However, an indirect impact might be a decrease in premium due to additional cancellations. • The direct impact to losses would be an increase in the size of the largest claims due to the larger coverage amounts. However, an indirect impact might be a decrease in losses due to either additional cancellations or new loss control measures implemented by homeowners as a result of inspections. • Assuming the increase to ITV is done through a re-inspection program, the cost of the program would likely increase expenses. However, the increase in expenses relative to the increase in premium is unclear.

Answer 145

1. Calculate expected basic limits loss and alae = expected L&ALAE ratio x (Premises/Operations Premium) 2. for each experience year, start with result from part 1. and detrend and multiply by eer and % unreported to make expected development 3. expected basic limits loss = the sum of (expected basic limits loss x detrend factor) for all experience years 4. add the result from 2. to (reported loss and alae (limited by basic limits and MSL)) to make experience ultimate 5. AER = experience ultimate/(expected basic limits loss)

Answer 146

Experience rating recognizes that each risk has a different loss potential, so by modifying the rate appropriately, the expected proﬁt potential for each risk can be made equal. This ensures that equity is achieved and rates are not unfairly discriminatory. Otherwise, risks with lower loss potential within a class would subsidize other higher loss potential risks.

Answer 147

• Changes in settlement procedures, such as change in case outstanding strength or claims closure rate. These cause changes in development patterns. One option is to use Berquist/Sherman adjustments. • Jury Awards / Legislation / Regulation - these can change type of loss, size of loss, and/or reporting patterns. May need to substitute report year data for accident year because loss may more closely correlate with report date. • Large Claims - individual large claims can distort reporting and/or payment patterns. One option is exclude these from the experience and evaluate separately.

Answer 148

• Changes in portfolio volumes - if there is a high growth rate, it can cause distortions in development factors due to signiﬁcant shifts in the average accident date in the exposure period. May substitute accident quarter for accident year data. • Change in policy conditions, such as deductibles, policy limits - this can change the size of loss distribution, changing the development. May substitute policy year data for accident year data. • Change in type of business written - this can include change in classes or territories. The different business may have different development patterns or loss ratios. One option would be to split the data into more homogeneous groups.

Answer 149

Being able to explicitly reﬂect inﬂation in the projection instead of it being included in the selection of development factors is an advantage of the method. Other advantages are the potential to gain greater insight into the claims process, such as claims reporting, settlement, and avg cost of claims. This helps us to continue to ask the right questions and allows us to ﬁnd the best estimate of ultimate claims. Also, freq-sev can be used with paid data only so it is independent of case outstanding changes.

Answer 150

Similar to classical ulae technique but uses expected paid losses instead of actual. It is useful when insurers have limited or volatile calendar year paid claims. However, for larger companies with more stable actual paid claims, the extra effort to estimate the expected paid claims may not be justified.

Answer 151

unpaid ulae = W x [Pure IBNR + 50% (Case + IBNER)] Where W is the selected (Paid ULAE)/(Paid Claims) ratio IBNER = Total IBNR - Pure IBNR

Answer 152

1. 0 ≤ Z ≤ 1 2. Z should increase as the number of risks increase. dZ/dn≥0 3. Z should increase at a non-increasing rate. d/dn(Z/n)<0

Answer 153

Adverse selection occurs when an insurer doesn't use a risk characteristic that is being used by other insurers. Since other insurers will attract the lower risk insureds based on this risk characteristic, the insurer not using the risk characteristic will be left with a higher than proportional share of the higher risks, for which it does not accurately price or underwrite. As such, the insurer will have a higher loss ratio.

Answer 154

Percent of expected losses above the deductible

Answer 155

when loss = face value

Answer 156

Calendar year performs the best in terms of responsiveness since there is no loss development.

Answer 157

Losses are summarized by the years the policies containing those losses were written

Answer 158

Policy year provides the best match between premiums and losses since the losses come from the same policies from which premium is earned

Answer 159

Take the sum of the 2006 diagonal minus the sum of the 2005 diagonal

Answer 160

Trending is done wierdly, each number in the row will have the same trend factor. (normally trend factors are the same on a diagonal basis)

Answer 161

the exposure base should be objective, and easy & inexpensive to obtain and verify

Answer 162

CY incurred loss is all payments made throughout the year + (case reserve at end - case reserve at beginning of year) If date of loss is after beginning of CY then it CY beginning case reserve is 0.

Answer 163

the data is the least mature compared to calendar year and accident year loss data

Answer 164

(1) apply the selected trend to the ground up losses of each claim (2) then determine what the total payment on each claim would be under the basic limits. (3) The basic loss trend is = (sum of all trended basic limits losses from (2)/sum of all untrended basic limits losses)-1

Answer 165

(1) Determine total excess losses (losses above limit - limit) (2) apply selected trend to ground up losses then determine what total excess losses would be after trending. (3) Excess loss trend is (2)/(1) - 1

Answer 166

If loss trends are negative, the basic limits trend will be closer to 0 than the more negative excess loss trend

Answer 167

The earliest date at which a loss can occur and still be covered by a claims made policy

Answer 168

An extended reporting period extends the time for which claims that occur during a claims made policy can be reported after the expiration

Answer 169

An advantage is that it is unbiased. A disadvantage is that it may not be accurate if rate indications have a high process variance.

Answer 170

(Credibility weighted Loss Ratio Relativity with complement of credibility)*(Current relativity) then rebase Complement of credibility is usually 1.0 but if pure premium method: cred weight pp rel with normalized current rel then rebase

Answer 171

LER(D) = (Sum of all losses capped at D)/(Sum of all losses uncapped) can also be LER = LAS(D)/LAS(L) can also be : (Sum of differences in Net Reported Losses across all available coverage levels)/(Sum of Net reported losses of the lower deductible across all available coverage levels) Indicated deductible relativity = 1-LER(D) = excess ratio

Answer 172

Calculate the the Change factors for all classes = (proposed relativity)/(current relativity). Then the proposed base rate for class A will be = (Class A current base rate) x(Change factor)x(1+desired rate change)/(Variable premium weighted average change factor)

Answer 173

• Data often isn't captured for what claims would have cost in the absence of actual policy limits, so the data is censored. • Data may need to be developed to ultimate and trended, as higher limits often experience higher development and trends.

Answer 174

If the average ITV of the book of business is less than assumed in the insurer's rates, then the rates will be too low (in the absence of a coinsurance clause or rates varying by ITV). If the actual average ITV is greater than what is assumed in the rates, then the rates will be too high. Over time, an insurer can adjust rates so that they are correct overall for the actual level of ITV on the book (assuming it is stable).

Answer 175

• Experience Rating - A credit or debit will be assigned to a risk based on the actual loss history of the risk. Larger risks will have more credibility given to their loss experience than smaller risks. • Schedule Rating - Underwriters assign judgmental credits or debits based on the risk characteristics of particular insured. There should be no overlap in characteristics already implicitly considered in experience rating

Answer 176

The asset share pricing model introduces multiple periods, persistency, and different assumptions for new and renewal business.

Answer 177

Sum of all next age losses over the sum of their respective this age losses

Answer 178

It uses paid data so it isn't affected by changes in case reserve adequacy

Answer 179

If there has been a change in claims department practices such as case reserving guidelines

Answer 180

Expected loss emergence = selected IBNR x (next age % reported - this age % reported)/(1-this age % reported)

Answer 181

Dollar based ulae varies by loss amount in dollars. Count based varies by claim count

Answer 182

Its one way to limit the impact of large individual shock losses on the rate indication.

Answer 183

LAS= (Las calculated normally)x(frequency)x(1+ULAE Provision)

Answer 184

The development factors for the ratio approach tend to be less leveraged than the development factors based on received S&S dollars. Same goes for ALAE ratio.

Answer 185

makes things easier

Answer 186

Same general formula as traditional/classic approach: Wx[pure ibnr + .5x(case + ibner)] Only here the denominator of W is the average of (paid loss & ALAE) and (reported Loss & ALAE). Take the average of the W's of each experience year for this equation.

Answer 187

Unpaid ULAE = (W x L) - M. (M is paid ULAE) This approach is flawed for 2 reasons. From a practical perspective, it is difficult to quantify ULAE on an accident year basis as would be needed in M above to correspond with the accident years in L. Additionally, this method is not responsive to changes in the ULAE to claims ratio.

Answer 188

Unpaid ULAE = W x (L - B) Where B = Claims Basis used to calculate W. If 60% of work is expended when claim is reported and 40% is spread over the life of the claim then B = .6xUltimate + .4xPaid. This is the preferred approach by Conger, and is what is used in the classical and Kittel approaches as well.

Answer 189

Unpaid ULAE = M x (L/B - 1) This approach is flawed for 2 reasons. From a practical perspective, it is difficult to quantify ULAE on an accident year basis as would be needed in M above to correspond with the accident years in L. Additionally, this method can be overly responsive to random fluctuations in ULAE emergence.

Answer 190

1. Estimates from the traditional approach are inaccurate if the book is changing in size 2. The traditional and kittel assumption that 50% of ULAE is spent on opening a claim and 50% is spent on closing may not be a good assumption

Answer 191

1. Trend 2. Development 3. Shock losses 4. Benefit levels

Answer 192

Claims made coverage is less impacted by trends, so pricing for these policies is less sensitive to uncertain trend amounts

Answer 193

• Hours worked is more directly proportional to expected loss than number of employees, so it would be appropriate to make the change for this reason.

Answer 194

• Hours worked may be more difficult to obtain and verify than number of employees depending on the recordkeeping of individual companies. For this reason, number of

Answer 195

• Changing the exposure base would be costly from an IT standpoint and a customer premium dislocation standpoint, so it would not be appropriate.

Answer 196

Since the denominator of frequency (earned exposures) will change, frequency will change. Since each employee works many hours, hours worked will be larger than number of employees, so frequency would decline.

Answer 197

Since severity is losses per claim count, neither are changing, so there is no impact to severity.

Answer 198

The impact to loss ratio depends on how the rating algorithm is changed. The numerator of the loss ratio (losses) will remain the same, but the premium may be impacted by the change in exposure, since premiums are calculated on a per-exposure basis and the exposure definition is changing.

Answer 199

1. Factor analysis 2. Cluster Analysis 3. CART (Classification/Regression tress) 4. MARS (Multivariate Adaptive Regression Spline) 5. Neural networks

Answer 200

1. Cap losses at basic limits ( separately derivate rates for excess losss and below low loss) 2. Cap losses and apply excess loss loading Same as previous method but losses are capped at a different amount and apply a loading to cover expected losses above cap level. 3. Remove ground-up losses and apply shock loss loading (remove -> loading for shock loss added -> back in

Answer 201

1. For losses above the basic limits , inflation will not have impact, but they will impact the excess layer. The trend is entirely in the excess layer 2. Losses just under the basic limit are pushed into the excess layer by the trend(inflation) , creating new losses for the excess layer

Answer 202

Premium trends and rate changes can cause historical expense ratios to be different from the future expense ratios.

Answer 203

Multiply Earned exposures by the weighted average relativity of other factors within the class. Then Calculate Pure Premium. Indicated Relativity will just be adjusted pure premium relativity.

Answer 204

Adjusted takes away the assumption of no correlation between exposures for different rating variables.

Answer 205

Mod = [ZpAp+(1-Zp)Ep+ZeAe+(1-Ze)Ee]/[E] Where Zp = E/(E+B) and Ze = wxZp p means primary an e means excess Ep=(D-factor)x(payroll/100)xExpected Loss Rate Ee=(1-D-factor)x(payroll/100)xExpected Loss Rate

Answer 206

Even if its only overfit on extreme values and the rest of it seems perfect

Answer 207

It requires case reserves to provide info about future development, this is more likely to be true when all claims have been reported in the first maturity of the triangle.

Answer 208

New Computer Systems, Accounting Changes, Changes in claim handling practices, Changes in Underwriting Guidelines

Answer 209

For some lines of business there may be claims with no claim payment but substantial ALAE.

Answer 210

More industry benchmarks are available on an AY basis for comparison. Also, it is useful when internal or external events that impact losses are correlated to accident dates.

Answer 211

Difference in Case Reserve Adequacy, Difference in Claim settlement rates, Difference in severities, Credibility. If Credibility is too low for one line then combining them for analysis may be beneficial.

Answer 212

i. Consistent definition of claim counts throughout the experience period. ii. The mix of the types of claims is relatively homogeneous iii. Claim Counts and severity will continue to develop in future periods as they have in past periods

Answer 213

1. Is it a differentiator of loss potential? 2. is it easy to obtain/verify? 3. Does it have a clear definition?

Answer 214

No use accident quarter data

Answer 215

Cape Cod does! Pay attention to this !

Answer 216

Recoveries such as Salvage and Subro are anticipated

Answer 217

1. A regulator might place limits on rate changes or rate differentials across segments. 2. If the insurer was using an asset share pricing approach, in which the insurer would look at a longer term view of profitability.

Answer 218

If all past rate changes impacted all classes equally, then it would be reasonable to use aggregate on-level factors. Otherwise no.

Answer 219

This means there is an extra 8% of premium paid six months after the policy expires

Answer 220

Assume half written on 4/1 and the other half written on 10/1 and calculate earned under that assumption.

Answer 221

Factor Analysis MARS CART Cluster Analysis Neural Networks

Answer 222

Combining similar risks into groups, resulting in fewer variables in a GLM.

Answer 223

These build a set of if-then rules to identify the most important variables in a GLM. Can detect variable interactions that can be incorporated in a GLM.

Answer 224

Help turn continuous variables into categorical variables by selecting appropriate breakpoints and using piecewise linear approximation. Can detect variable interactions that can be incorporated in a GLM.

Answer 225

Helps identify previously unknown interactions between variables that can be incorporated into a GLM.

Answer 226

The same kind of transaction costs the same ULAE regardless of size

Answer 227

1. ULAE is not directly proportional to claims 2. Using ULAE-to-claims ratios results in volatile ULAE when claims are volatile

Answer 228

Internal Management: The estimates are used to make business decisions in pricing and underwriting, as well as strategic and financial decisions. Inaccurately high estimates could lead to decisions such as raising rates or tightening underwriting guidelines.

Answer 229

Investors: Changes whether or not the company looks like a bad investment.

Answer 230

Regulators: The estimates are used to monitor the solvency of the insurer. inaccurately high estimates resulting in a low profit might cause a regulator to restrict the insurer's ability to write new business.

Answer 231

The ratio approach produces ratios of ultimate S&S to ultimate claims, which can be used as a diagnostic. If a ratio for a particular year seems unreasonable, a more reasonable S&S ratio can be selected for that year.

Answer 232

A Quota Share treaty means that an insurer cedes a constant percent of all claims to the reinsurer. As such, the net claims will be a constant percent of gross claims.

Answer 233

A per-risk or per-occurrence Excess of Loss (XOL) treaty means that the insurer will cede all amounts above a certain retention and up to a certain limit on individual claims.

Answer 234

A Stop Loss treaty, also known as an Aggregate Excess of Loss treaty, means that the insurer will cede all amounts above a certain retention on the aggregate loss amounts for the insurer's book

Answer 235

For Quota Share treaties, the tail factors for gross, net, and ceded triangles will be the same since the net and ceded triangles are just constant multiples of the gross triangle.

Answer 236

The tail factor for the ceded triangle will typically be larger than for the gross triangle since once the retention is hit, all development occurs in the ceded layer. The tail factor for the net triangle will typically be smaller than for the gross triangle since the net losses may be capped by the reinsurance protection.

Answer 237

1. Combining ALAE with Claims and estimate them together 2. Develop an ALAE triangle separately 3. Ratio approach that develops ALAE to Paid Claims

Answer 238

1. A rate is an estimate of the expected value of future costs. 2. A rate provides for all costs associated with the transfer of risk. 3. A rate provides for the costs associated with an individual risk transfer 4. A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.

Answer 239

Just use parallelogram method

Answer 240

Identifying a lower cost group of insureds that has not been identified by the competition and recognizing that difference in underwriting or marketing instead of rating

Answer 241

1. Protect the insurance systems financial soundness 2. Enhance Fairness 3. Permit economic incentives to operate and thus encourage widespread availability of coverage.

Answer 242

1. Small companies usually have less sophisticated safety programs 2. Small companies usually dont have return-to-work programs for injured workers 3. Not as impacted or do not qualify for experience rating, so they have less incentive to mitigate risks

Answer 243

1. accurate (close to the target) 2. Unbiased (On target on average) 3. Statistically independent from the base statistic 4. Available (other wise not practical) 5. Easy to compute 6. Logical relationship to base statistic

Answer 244

1. Take legal action 2. Revise UW guidelines to limit bus at inadequate rates 3. Revise marketing to limit bus at inadequate rates 4. Use proxy variable when a variable is prohibited

Answer 245

There will be no mid-term charge for changes in the driving record sub-classification.

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