Short Answer Questions

Question 1

Policy Year; Advantages/Disadvantages

Answer 1

Summarize premiums and losses by the years the policies generating those premiums and loss were written.

Advantage - best match of premiums and losses
Disadvantage - longest to develop

Question 2

CY; Advantages/Disadvantages

Answer 2

This considers all policies with premium written or earned during the year (depending on the measure) and all loss transactions during the year. However, any premium audits that occur after the CY is over are still considered.

Advantage - data is final immediately once the year is over
Disadvantage - provides poor matching of premiums and losses

Question 3

CY/AY; Advantages/Disadvantages

Answer 3

Advantage - Provides better match of premiums and losses than CY and is faster to develop than PY data
Disadvantage - takes longer to develop than CY

Question 4

When to use PY instead of AY

Answer 4

when there has been a sudden change in policy limits or deductibles, since the change can be isolated on PY rather than AY

Question 5

When to use RY instead of AY

Answer 5

when there has been a change in claims department practices, such as case reserving guidelines

Question 6

When to use earned exposures instead of claim counts

Answer 6

when the definition of claim count is inconsistent or unreliable

Question 7

Fundamental Insurance Equation

Answer 7

premium=loss+LAE+UW Expense+Profit

Question 8

Combined Ratio

Answer 8

Loss Ratio * (1+LAE to Loss) + UW Expense

Question 9

Operating Expense Ratio

Answer 9

Combined Ratio - Loss Ratio

Question 10

Describe 4 types of external data that can be used in ratemaking/reserving

Answer 10

1) statistical plans - aggregated data across insurers - such as NCCI
2) other aggregated data - basically the same such as Fast Track
3) competitor rate filings and manuals
4) other 3 party data - economic/demographic

Question 11

Why would an actuary use basic limit losses for an overall rate indication?

Answer 11

basic limit losses are capped at the policy limit, using them will lessen the volatility from large or shock losses. If using the loss ratio method, you must use premiums adjusted to basic limits as well.

Question 12

describe 3 ways an insurer can limit its CAT exposure other than changing rates

Answer 12

1) restrict writing in high risk areas
2) require higher deductibles in high risk areas
3) purchase reinsurance

Question 13

How are experience rate changes and law amendment changes different?

Answer 13

experience rate changes are meant to adjust projected future experience, while law amendment changes adjust rates to match statutory changes in benefits.

Experience rate changes impact existing policies as they renew, while law amendment rate changes impact existing policies on the date of the law amendment rate change.

Question 14

parallelogram method; advantage/disadvantage

Answer 14

Advantage - quicker to calculate

Disadvantage - not as accurate, assumes policies are written evenly throughout the year

Question 15

2 reasons PY premium could develop beyond the end of the PY

Answer 15

1) Premium Audits

2) Retrospective rating premium adjustments

Question 16

2 reasons why increased limits loss trends are greater than basic limit loss trends

Answer 16

1) for losses already greater than the basic limit, the trend will not the basic limit layer but will increase losses in the excess layer
2) for losses close to the basic limit, the trend will only impact the basic limit layer up to the cap - but will create a new loss in the excess layer

Question 17

describe a situation where 2 step trending would be preferred to 1 step trending

Answer 17

when you expect the prospective trend to be different than historical trend. For example, if the history has a shift in policy limits that you do not expect in the future.

Question 18

Explain why we might calculate premium trend with WP vs EP

Answer 18

WP - allows you to incorporate more recent data

EP - this is what is used in rate indications

Question 19

describe the “overlap fallacy” between loss trend and loss development

Answer 19

there is no overlap. loss development makes sure the policies are priced to cover ultimate losses. loss trend makes sure the ultimate losses are at the level corresponding to the subject future period. Historical losses are trended to the average accident date of the future period, while loss development takes those trended undeveloped losses to their ultimate level..

Question 20

list reasons why we might see a negative premium trend

Answer 20

1) customers moving to a higher deductible
2) customers could be purchasing less coverage
3) insurer might be writing more low risk insureds
4) insurer could be non-renewing higher risk insureds