Ratemaking - Losses and LAE

Question 1

Name 2 examples of short-tailed lines and 3 example of long-tailed lines lines

Answer 1

Short-tailed: automobile physical domage and homeowners

Long-tailed: Commercial liability, worker compensation and personal umbrella.

Question 2

Give 3 reasons why the LDF could be under 1.00.

Answer 2

1. Negative claims can happen in case of salvage.
   For example, when a vehicle is declared total loss, the insurer may sell the body to the scrap or for part.
2. Negative claims can happen in case of subrogation.
   For example, the insurer can approach the responsible party for indemnification of those amount.
3. When the case reserve are set to high

Question 3

Why the extraordinary losses should be removed from the historical data used to measure the LDF.

Answer 3

If the extraordinary loss is including in the first valuation date of the accident year, than the LDF will be underestimated*

If the extraordinary loss is including pass the end of the accident year, the LDF will be overestimated.

• This assume that the estimate of the extraordinary loss is accurate and will develop less than a non-excess loss.

Question 4

Why the changes in coverage or benefit should be removed from the historical data used to measure the LDF.

Answer 4

If the change affect policies prospectively, change will be reflected in the next accident year.

If the change affect all claims occurring after a certain date, losses amount will change, but the LDF will not be affected.

If the change affects all claims not yet settled, regardless of the occurred date, losses distribution will be shifted. Link ratio will be distorted.

Question 5

Name 3 exemple of factor that can drive Loss Trend

Answer 5

Monetary inflation, increasing medical cost and advancement in safety technology.

Question 6

What is the basic assumption of the Chain Ladder method? Why this assumption might not be true?

Answer 6

Historical payment patterns are indicative of pattern expected in the future.

This assumption can be false in case there is change in claims handling methodology or philosophy or even dramatic change in claims stafffing; resulting in claims settled faster or slower.

Question 7

Why the ULAE are difficult to incorporate into the loss projection?

Answer 7

Because the claims department can be working at any time on many claims and many lob in the same time.