Siewert Flashcards
Advantages of a high deductible program
- Achieves price flexibility while passing additional risk to larger insureds
- Reduces residual market charges and premium taxes
- Gives cash flow advantages to insured (insurer pays claim first and must seek reimbursement from insured)
- Provides incentive for insureds to control losses while protecting them from large losses
- Allows “self-insurance” without subjecting insureds to demanding state requirements
Describe the loss ratio approach
- 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
Advantage of the loss ratio approach
- Can be used when no data is available or when data is immature
- Loss ratio estimates can be consistently tied to pricing programs
- Relies on a more credible pool of company and industry experience
Disadvantage of the loss ratio approach
- Ignores actual emerging experience (not as useful for mature years)
- May not properly reflect account characteristics, since development may emerge differently due to the exposure written
Describe the implied development approach
- 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
Ways to determine the index value
- Fit a line to average severities over a long-term history
- Use an index that reflects the movement in annual severity changes
Advantages of the implied development approach
- Provides an estimate of excess losses at early maturities even when excess losses have not emerged
- Development factors for limited losses are more stable than those determined for excess losses
- Estimating deductible losses helps determine the asset value represented by service revenue
Disadvantage of the implied development approach
Does not explicitly recognize excess loss development
Describe the direct development approach
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
Advantage of the direct development approach
Explicitly recognizes excess loss development
Disadvantage of the direct development approach
- Excess factors tend to be overly leveraged and extremely volatile
- If excess losses have not yet emerged, we cannot estimate IBNR
Describe the credibility weighting BF approach
replies on weighting indications based upon actual experience (direct development approach) with expected values (loss ratio approach)
Advantage of the credibility weighting BF approach
- We can determine liabilities either directly or indirectly
- Gives us the ability to tie into pricing estimates for recent years where excess losses have yet to emerge
- Provides more stable estimates over time
Disadvantage of the credibility weighting BF approach
Ignores actual experience to the extent of the complement of credibility (may need to find weights that are more responsive to the actual experience)
Pros and Cons of using an inverse power curve for tail factor
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)
Describe the distributional model
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
Advantages of a distributional model
- Helps tie the relativities to the severities and provides consistent loss development factors
- Allows for interpolation among limits and years
Dealing with aggregate limits for high deductible plans - Option 1, Collective risk modeling
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.
Dealing with aggregate limits for high deductible plans - Option 2, NCCI Table M
- more practical than collective risk modeling
- using adjusting expected losses to reflect loss limits
Two ways to handle ALAE under a high deductible program
- Account manages expense itself (ALAE not covered) - Development patterns reflect loss only
- ALAE is treated as loss and subjected to applicable limits
Properties of severity relativities
- Severity relativity should decrease as age increase. (because more losses are capped at the per-occurrence limit as age increases)
- 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)
Key relationships from collective risk model
- 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)
- 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)
