Siewert Flashcards
<p>Identify five advantages of a high deductible program.</p>
<p>⇧ Achieves price flexibility while passing additional risk to larger insureds
⇧ Reduces residual market charges and premium taxes
⇧ Gives cash flow advantages to insured
⇧ Provides incentive for insureds to control losses while protecting them from large losses
⇧ Allows “self-insurance” without subjecting insureds to demanding state requirements</p>
<p>Briefly explain why we need to index limits for inflation when calculating development factors
for various deductibles.</p>
<p>It keeps the proportion of deductible/excess losses constant about the limit from year to year</p>
<p>Provide two methods for indexing the limits. (Siewert)</p>
<p>⇧ Fit a line to average severities over a long-term history
⇧ Use an index that reflects the movement in annual severity changes</p>
<p>One option for estimating reserves for an excess layer is to use a distributional model.
a) Briefly explain how a distributional model works.</p>
<p>It models the development process by determining distribution parameters that vary over
time. Once the parameters are determined, we can calculate severity relativities. Comparing
these relativities over time results in development factors</p>
<p>One option for estimating reserves for an excess layer is to use a distributional model.
b) Identify three methods for estimating the parameters of a distributional model.</p>
<p>⇧ Method of moments
⇧ Maximum likelihood estimation
⇧ Siewert’s approach – minimize the chi-square between the actual and expected severity
relativities around a particular deductible size</p>
<p>One option for estimating reserves for an excess layer is to use a distributional model.
c) Provide two advantages of a distributional model.</p>
<p>⇧ Provides consistent loss development factors
| ⇧ Allows for interpolation among limits and years</p>
<p>Explain why development for losses excess of aggregate limits decrease more rapidly over time with
smaller deductibles than with larger ones.</p>
<p>Aggregate limits only cover losses under the deductible. Since most of the later development
occurs in the layers of loss above the deductible, excess of aggregate losses reach their
ultimate value sooner for smaller deductibles</p>
<p>Describe two ways to handle ALAE under a high deductible program.</p>
<p>⇧ Approach 1: Account manages expense itself (i.e. ALAE not covered) – development
patterns reflect losses only
⇧ Approach 2: ALAE is treated as loss and subjected to applicable limits – development
patterns reflect a combination of losses and expenses</p>
<p>Provide two advantages and two disadvantages of the loss ratio method.</p>
<p>⇧ Advantages
• Can be used when no data is available or when data is immature
• Loss ratio estimates can be consistently tied to pricing programs
⇧ Disadvantages
• Ignores actual emerging experience (not as useful for mature years)
• May not properly reflect account characteristics since development may emerge differently
due to the exposures written</p>
<p>Provide two advantages and one disadvantage of the implied development method.</p>
<p>⇧ Advantages
• 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
⇧ Disadvantage – does not explicitly recognize excess loss development</p>
<p>Provide one advantage and two disadvantages of the direct development method.</p>
<p>⇧ Advantage – explicitly recognizes excess loss development
⇧ Disadvantages
• Excess factors tend to be overly leveraged and extremely volatile
• If excess losses have not yet emerged, we can’t estimate IBNR</p>
Provide two advantages and one disadvantage of the credibility-weighting method.
⇧ Advantages
• Gives us the ability to tie into pricing estimates for recent years where excess losses have not emerged
• Provides more stable estimates over time
⇧ Disadvantage – ignores actual experience to the extent of the complement of credibility
<p>Use the Loss Ratio Method to estimate Reserves for a<br></br>
High Deductible Policy</p>
H
<p>Use Implied Development to estimate the Reserves<br></br>
for a High Deductible Policy</p>
<p>Use Direct Development to estimate the Reserves for<br></br>
a High Deductible Policy</p>
<p>Development Model - Formulafor LDF as a function<br></br>
of Limited and Excess LDF’s</p>
<p>Development Model - Relationship of LDF and<br></br>
Limited LDF</p>
<p>Development Model - Relationship of LDF and Excess<br></br>
LDF</p>
<p>Development Model - Relationship between Limited<br></br>
and UnLimited Incremental LDF</p>
<p>Development Model - Relationship between Excess<br></br>
and UnLimited Incremental LDF</p>
<p>Distributional Model - How to use it to estimate<br></br>
Reserves for High Deductible Policies</p>
