Ratemaking - Premium Flashcards
Pros and cons of the Parallelogram?
Pros:
- Easy to use/calculate
Cons:
- Less precise than the EoE method.
- Approximation assume that policies are written uniformly thouthout the year, which can be inaccurate.
- Approximation use global rate, which can be inappropriate for sophisticated rates
Pros and cons of the Extension of Exposures method?
Pros:
- Most accurate method
Cons:
- Needs significant number of calculations
- Require detailed data
Explain why using the average premium is more accurate than the total premium in a trend analysis.
Because the average premium is not affected by increase or decrease in earned units (e.g., When the compagny is growing/shrinking).
Why should the written premium used instead of the earned premium in trend analysis.
Because the written premium reflect much faster change in mix of business than the earned premium.
Why should an Actuary on-level premium before making a premium trend analysis.
Because the rate changes would be reflected as a abrupt change (corresponding to the effective date of the rate change) in the premium trend.
Explain why premium trending is needed in as analysis of the indicated rate level.
To take into consideration the change in mix of business (distributionnal change) between the historical and future premium.
Name and explain the 3 ajustments needed for premium in an ratemaking analysis for indicated rate.
On-Level Premium: Correcte the premium for any rate change.
Premium Development: Develop premium to ultimate levels if the premium is still changing.
Premium Trend: Ajust the premium for any change in mix of business.
Give two examples that explain the needs for premium development
- Premiums audits
- Incompete year of data
Explain what is a premium audits.
A premium audits happen on some line of business where the insured pay premium base on an estimate of the total exposure. At the end of term, real premium is calculated resulting in variation in premium data.
What are the two method of aggregation for premium? Is the premium fixed at the end of year?
- Calendar year: Fixed premium
- Policy year: Premium is not fixed if the line of business is subject to premium audits.
Which type of premium is the best estimate of the mix of businessn as of a given date.
In-force premium.
Why in-force premium can be more complicated in case of mid-term adjustment?
Because if the insured change is coverage resulting in a premium from 400 to 800, he will pay 700$ (=400x0.25 + 800x0.75), but the in-force will show either 400$ or 800$.
Which type of premium is often used to measure the impact of a rate change on a existing portfolio?
In-force
Why historical premium need to be on-level?
Because the historical experience period or the projected premium will be understated or overstated.
Explain the Extension of exposure method.
The EoE method involve rerating every policy to restate the historical premium to the amount that would be charged under the current rates.
When using historical data, what are the two side that be needs to balance?
Stability (more historical data) and responsiveness (relevant data).
Why it could be more accurate to use incompleted premium year?
In order to have responsive data. This is often the case with policy year.
The actuary must estimate how premium will develop to ultimate. Expain 3 pattern of premium development?
- The type of plan permitted by the jurisdiction or offered by the carrier
- The stability of the historical difference between original premium estimate and the final audited premium.
- Internal compagny operations (auditing procedure, marketing stategy, accounting policy, etc.)
How exposure can affect the average premium over time? Give two example.
When the exposure is inflation sensitive (e.g., payroll-worker compensation) or receipts (general liability).
When it is required to trend exposure?
When the exposure is inflation-sensitive.
What is the goal of premium trending?
To reflect the change in the overall distributional changes.
Give 3 examples of circumstances that can change average premium?
- Rating characteristic changing over time (e.g., amount of insurance for home changing with inflation)
- Change in coverage may change the average premium at renewal.
- Aquisition of another compagny portfolio can cause a one time change.
Is the average premium should use a exposure basis or policy basis?
Exposure basis
Assuming an adequate amount of data, what type of average premium should be use in premium trend?
Quarterly written premium
One-Step premium trending method..
- How to compute the Trend Selection Factor?
- How to compute the Trend Period?
- Average annual change observed in written premium.
- From average written date of earned premium used to average written date of policies with new rates.
Explain the downside of the One-Step trending method?
It is difficult to apply this approch when:
- The changes in average premium vary significantly year-by-year.
- The historical avg. premium and future avg. premium are significantly different (e.g., by forcing a deductible change)
Why use the Two-Step trending method over the One-Step trending method? Give an example?
When the premium trend is expected to change over time.
Example is when homeowners insurer observes significant increase in amount of inssurance in historical premium, but is not expecting this to continue in the future.
Two-Step premium trending method..
- How to compute the Current Trend Factor?
- How to compute the Projected Trend Factor?
- How to compute the Trend Period?
- Latest Avg. WP divised by Historical Avg. EP
- Average annual change observed in written premium.
- Mid point of the Latest avf. WP to the average written date for policies during effective rate.
