Retro Rating

Question 1

Retro Rating Pros for Insured

Answer 1

-Incentive for loss control
-Immediate reflection of good experience
-Cash flow benefits
-reduced premium tax

Question 2

Retro Rating Pros for Insurer

Answer 2

-Incentive for loss control
-Risk sharing
-Less capital required

Question 3

Retro Rating Cons for Insured

Answer 3

-Uncertain costs
-Immediate reflection of bad experience
-Loss of immediate tax deductibility
-Ongoing admin costs

Question 4

Retro Rating Cons for Insurer

Answer 4

-Higher admin costs
-Credit risk
-Reduction in cash flow

Question 5

Basic Premium components

Answer 5

-Fixed Expense
-UW Profit
-Charge for per-occurrence limit (aka XS losses)
-Charge for min/max ratable loss (aka net insurance charge)

Question 6

LDD Plans vs Retro Plans

Answer 6

same risk transfer if:
-retro per-occ limit = LDD per-occ ded
-retro max ratable = LDD agg ded limit
-no retro min ratable

LDD typically lower cost, less prem tax, better cash flow

Question 7

Self-Insured Retention

Answer 7

Insured handles claims
Insurer reimburses

No credit risk
LAE applies to only XS
Policy limit not eroded by retention

Question 8

Dividend Plan

Answer 8

If A<E, insurer pays dividend (not considered premium so no tax savings)

If A>E, insured pays nothing, but may have to return dividend

Not a balanced plan

Question 9

Clash Coverage

Answer 9

Limits single occurrence that impacts multiple LOBs

Question 10

Basket Agg Coverage

Answer 10

Total agg limit on ratable loss from multiple loss-sensitive plans

Question 11

Multi-Year Plans

Answer 11

Need to allow for trend in limits

Question 12

How to Protect from Credit Risk

Answer 12

-Hold collateral
-Develop losses in retro formula
-Defer adjustments to a specific maturity

Question 13

Insurance Charge

Answer 13

Reflects max ratable loss/LDD aggregate limit

aka Agg XS Loss factor

At 1.25, reps average amount by which aggregate losses exceed 1.25*expected

Value is a % of expected loss

Question 14

Insurance Savings

Answer 14

Reflects min ratable loss

aka Agg min loss facotr

Question 15

Table M

Answer 15

No per-occurrence limit

Question 16

Table M_D

Answer 16

Agg dist. excludes XS per-occ ded
Different tables for every per-occ limit

Question 17

Table L

Answer 17

Account for both per-occ and agg limits

Separate tables for every per-occ limit

CA data only

Includes both in Insurance Charge (so don’t need to add term in BP)

Question 18

ICRLL Method

Answer 18

Simulate M_D with only M
Shifts ELG to group with smaller insurance charges to remove per-occ limit and agg limit overlap

Per-occ limit reduces variance, but so does size of risk so works

Question 19

Balance Equations

Answer 19

Used if have Min/Max premium instead of ratable loss

Question 20

Premium Discount

Answer 20

Retro: Reduction to expenses in BP

GCP: Explicitly deducted from SP

Question 21

Explain Table M overlap

Answer 21

When both limits, per-occ limit makes it less likely that agg limit will be hit. Table M assumes no per-occ limit so overestimates likelihood of exceeding agg.

Question 22

Pros of Parameterized Table M

Answer 22

-When thin data
-When large gaps between entry ratios (don’t need to interpolate)
-Consistent charges

Question 23

Cons of Parameterized Table M

Answer 23

-Misleading charges if use wrong assumptions
-More computationally complex than often desired level of precision