Section 5 - Glossary & other stuff

Question 1

Describe the difference between claim liabilities and premium liabilities.

Answer 1

Claim liabilities relate to claims that occurred on or before the
accounting/valuation date, regardless of whether it has been reported or not.

Premium liabilities relate to claims that occurred after the accounting/valuation
date and are associated with the unexpired portion of policies effective on or
before the accounting/valuation date

Question 2

Describe the purpose of a residual market mechanism

Answer 2

A residual market mechanism provides a means of obtaining coverage for
individuals or organizations who are unable to secure insurance protection in the
open market

Question 3

Describe one reason why an indicated rate change using a pure premium approach may not result in the same as Claim ratio

Answer 3

One reason the indicated rate change from a pure premium approach may not match that from a claims ratio (loss ratio) approach is that the earned premium used in the claims ratio method may not reflect the current rate level, while the pure premium method builds rates from expected costs forward.

Another way to see it …..
The premium adjustment factors for trend and on-level factors are both approximations used to restate historical earned premiums as if they were at the current rate level and mix of exposures for the forecast period.

Question 4

Identify why a separate trending procedure for fixed expenses may not be required when analyzed on a per-exposure basis.

Answer 4

When the forces affecting changes in expenses (i.e., the expense trend) are similar to those driving changes in premiums, a separate trend adjustment for fixed expenses may not be necessary.

Question 5

Explain how implementing a lower rate change than indicated will result in higher rate indications for the next rate review using the claim ratio approach.

Answer 5

Implementing a lower rate increase than indicated would mean charging lower premiums than needed to achieve the required profit.
This will lead to higher claim ratios which will lead to higher rate indications for the next review than would have been had the full rate change been implemented.