Study 7 - Pricing the Risk Flashcards
Define pure premium
Portion of the total premium that is needed to pay expected losses. It does not take into account money needed for company expenses
Define premium
The price of insurance protection for a specified risk for a specified period of time
Define acquisition cost
The cost of putting a business on the books and acquiring the premium. The items involved are not standard with all insurers, but generally may include items such as commissions, field representative costs, premium tax, and perhaps some of the relevant head office acquisition costs of operation
Define commission
Compensation based on the amount of production; for example, independent insurance agents are compensated on the basis of a percentage of the premium. The percentage varies with different lines of insurance
What are development factors?
Adjustments to current reserves for claims that have yet to be settled
What are trend factors?
Adjustments applied to all losses to reflect what they would probably cost if they were to occur next year rather than having occurred at some time in the past
What are administrative expenses?
General expenses incurred to operate the
ie. Buying/leasing equipment, purchasing office supplies, paying salaries and benefits for staff, and covering interest costs on debt
What are six common items go into allocating premium?
Pure premium, development factors, trend factors, acquisition costs, administration expenses, profit
What are ULAEs?
Unallocated loss adjustment expenses
Cannot be attached or attributed to a single claim
Define underwriting profit
The amount of money an insurance company gains as a result of its insurance operations. Excess of earned premiums collected over loss payments and expenses
Define underwriting loss
The amount of money that an insurance company loses as a result of its insurance operations, it excludes investment transactions and income taxes
What is often used to offset underwriting losses?
Investment income
Define actuary
One who specializes in the mathematics of insurance, mortality rates and the like
Define ratemaking
The process of compiling and analyzing data to establish rates that accurately reflect the level of risk. Usually performed by actuaries
Define rate
Amount charged to an insured that reflects the expectation of loss for a covered risk, insurance company expenses, and profit. In other words, it is the basis of premium calculation for the insurance provided for the exposure