Siewert

Question 1

Advantages of a high deductible program

Answer 1

1. Achieves price flexibility while passing additional risk to larger insureds
2. Reduces residual market charges and premium taxes
3. Gives cash flow advantages to insured (insurer pays claim first and must seek reimbursement from insured)
4. Provides incentive for insureds to control losses while protecting them from large losses
5. Allows “self-insurance” without subjecting insureds to demanding state requirements

Question 2

Describe the loss ratio approach

Answer 2

• Use when no data is available
• use for immature years where data is sparse
• approaches for estimating the per occurrence charge include estimating the excess ratio based upon company experience and/or using an industry excess ratio

Question 3

Advantage of the loss ratio approach

Answer 3

1. Can be used when no data is available or when data is immature
2. Loss ratio estimates can be consistently tied to pricing programs
3. Relies on a more credible pool of company and industry experience

Question 4

Disadvantage of the loss ratio approach

Answer 4

1. Ignores actual emerging experience (not as useful for mature years)
2. May not properly reflect account characteristics, since development may emerge differently due to the exposure written

Question 5

Describe the implied development approach

Answer 5

• Develop full coverage losses to ultimate
• development deductible losses (all losses limited by the deductible) to ultimate by applying development factors that reflect various inflation indexed limits
• determine the ultimate excess losses by subtracting the limited ultimate losses from the full coverage ultimate losses

Question 6

Ways to determine the index value

Answer 6

1. Fit a line to average severities over a long-term history
2. Use an index that reflects the movement in annual severity changes

Question 7

Advantages of the implied development approach

Answer 7

1. Provides an estimate of excess losses at early maturities even when excess losses have not emerged
2. Development factors for limited losses are more stable than those determined for excess losses
3. Estimating deductible losses helps determine the asset value represented by service revenue

Question 8

Disadvantage of the implied development approach

Answer 8

Does not explicitly recognize excess loss development

Question 9

Describe the direct development approach

Answer 9

Focuses on excess development directly
- Given development factors for limited and full coverage losses, excess loss development factors are calculated so that excess factors in conjunction with limited development factors balance back to full coverage factors

Question 10

Advantage of the direct development approach

Answer 10

Explicitly recognizes excess loss development

Question 11

Disadvantage of the direct development approach

Answer 11

1. Excess factors tend to be overly leveraged and extremely volatile
2. If excess losses have not yet emerged, we cannot estimate IBNR

Question 12

Describe the credibility weighting BF approach

Answer 12

replies on weighting indications based upon actual experience (direct development approach) with expected values (loss ratio approach)

Question 13

Advantage of the credibility weighting BF approach

Answer 13

1. We can determine liabilities either directly or indirectly
2. Gives us the ability to tie into pricing estimates for recent years where excess losses have yet to emerge
3. Provides more stable estimates over time

Question 14

Disadvantage of the credibility weighting BF approach

Answer 14

Ignores actual experience to the extent of the complement of credibility (may need to find weights that are more responsive to the actual experience)

Question 15

Pros and Cons of using an inverse power curve for tail factor

Answer 15

Pros: it is consistent for each limit, and it produces uniformly decreasing tail factors
Cons: bias exists due to extending each limit to the same maturity (lower limits should fully develop much sooner than higher limits)

Question 16

Describe the distributional model

Answer 16

Using loss data to determine development factors can lead to instances where limited development is actually greater than unlimited development.
The distributional approach models the development process by determining severity distribution parameters that vary over time.
Once the parameters are determined, we can calculate the severity relativities.
Comparing those relativities over time results in development factors

Question 17

Advantages of a distributional model

Answer 17

1. Helps tie the relativities to the severities and provides consistent loss development factors
2. Allows for interpolation among limits and years

Question 18

Dealing with aggregate limits for high deductible plans - Option 1, Collective risk modeling

Answer 18

Use collective risk modeling techniques to determine the loss development factors, relying on the loss distributions described for deductible limits in conjunction with claims frequency distributions.
- Model severity with Weibull distribution and claim counts with Poisson distribution
- Development for losses excess of aggregate limits decreases more rapidly over time with smaller deductibles than large ones.

Question 19

Dealing with aggregate limits for high deductible plans - Option 2, NCCI Table M

Answer 19

• more practical than collective risk modeling
• using adjusting expected losses to reflect loss limits

Question 20

Two ways to handle ALAE under a high deductible program

Answer 20

1. Account manages expense itself (ALAE not covered) - Development patterns reflect loss only
2. ALAE is treated as loss and subjected to applicable limits

Question 21

Properties of severity relativities

Answer 21

1. Severity relativity should decrease as age increase. (because more losses are capped at the per-occurrence limit as age increases)
2. Severity relativity should be higher for a larger limit (because a higher limit means less of the loss is capped, so the relativity is higher)

Question 22

Key relationships from collective risk model

Answer 22

1. Aggregate excess loss development drops off faster for smaller per-occurrence deductible limits (because later development is more likely for larger claims that already are over the deductible)
2. Higher aggregate limits have more leveraged LDFs (because there are fewer losses excess the aggregate limit when the aggregate limit is high, especially at earlier periods)