Ratemaking - UW Expenses And Profit Flashcards
What does the All Variable Expense Method assume?
That the expenses ratio is consistent across the historical and projected method.
Where is the All Variable Expenses Method is still used? Give an example of LOB.
Where the UW expenses are mostly variable, like in commercial line.
Which type of UW expenses are divised by Earned Premium and which by Written Premium.
Expenses incurred at the inception date are divised by the written premium.
Expenses incurred throughout the year are divised by the earned premium.
Explain how the choice of the denominator (WP/EP) in the expense ratio can have an impact on the ratemaking?
The the volume of the compagny is not changing, there are few impact (because EP approx WP)
- If the compagny is growing (shrinking), the WP wil be higher (lower), and the impact will be bigger.
- Normaly, when the compagny is growing (shrinking), the acquisition expenses will be higher (lower) (e.g., because of more marketing).
Names which type of premiums (WP/EP) should be used in the ratio expenses?
- General Expenses
- Other Acquisition
- Commissions and Brokerage
- Taxes, Licenses, and Fees
- General Expenses -> Written Premium
- Other Acquisition -> Earned Premium
- Commissions and Brokerage -> Earned Premium
- Taxes, Licenses, and Fees -> Earned Premium
Nmes which type of data (Countrywide/State) is normaly used for the UW expenses ration.
- General Expenses
- Other Acquisition
- Commissions and Brokerage
- Taxes, Licenses, and Fees
- General Expenses -> Countrywide
- Other Acquisition -> Countrywide
- Commissions and Brokerage -> Countrywide or State
- Taxes, Licenses, and Fees -> State
For which raison the actuary might not select an expenses ratio that follow the historical ratio?
- If the commission structure is changing
- If productivity gains led to reduction in staffing level and expenses.
- A growing portfolio can cause expenses to decrease as the volume will likely increase faster than the expenses.
Can everything can be added to the UW expenses?
No, few state have restrictions on what can be added.
For example, might not allowed
- Charitable contributions
- Lobbying expenses
Explain the potential distortions of the All Variables Expenses Method.
Since all expenses are variable, expenses are underestimated for small premium and overestimated for big premium policy.
When does the Premium-Bases Projection Method is used?
When the compagny have significant amount of both fixed and variable UW expenses.
What does the Premium-Bases Projection Method assume?
Like the All Variable Expenses Method, that expense ratios are constant across the historical and future projected period.
Explain the potential distortions of the Premium-Based Projection Method.
Since the fixed expense ratio - by definition - doesn’t vary by premium, the fixed expense will be distorded if the historical premium have a big difference with the projected premium.
- Recent rate change (solved by using on-level historical premium)
- Distrivutional shifts that change the average premium. (solved by trending premium to prospective level)
- This method can create inequity for state/province when countrywide expense are used.
In the Exposure/Policy-Based Projection Method, what drive the choice of using exposure versus policy count?
We use exposure is the fixed expense are assumed to change by exposure and we use policy count if the the fixed expense are assumed to change by policy.
What are the shortcoming of the Exposure/Policy-Based Projection Method?
- Still need to split expense into fixed and variable, generally done judgmentally. This (%) choise has no material impact in the indication.
- Still allocates countrywide fixed expense inequitely (base on exposure/policy count instead of premium).
- Some expense considered fixe might change by characteristic like new business and renewal -> inequety.
- The existence of economies of scale in a changing booko may reveal increase or decrease in projected average fixed expenses figures.
Explain the economics of scale and how it affect the fixed ratio in the Exposure/Policy-Based Projection Method.
The method implie that expense are constant by units, by this might not be true because of the economics of scale.
-> A constant ratio meant that fixed expense increase or decrease proportionnaly to exposure.
The economics of scale is the fact that more the book will be big, more the cost will be spead over larger exposure/policy.
