Study 7: Pricing the Risk - Key Terms Flashcards
Actuary
One who specializes in the mathematics of insurance, mortality rates, and the like.
Law of large numbers
The mathematical premise that states that the degree of uncertainty is reduced as the number of events increases.
Premium
The price of insurance protection for a specified risk for a specified period of time.
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.
Loss ratio
The loss ratio is the ratio of total losses paid out in claims plus adjustment expenses divided by the total earned premiums. Usually expressed as a percentage.
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.
Schedule rating
A method of rating risks by measuring them against fixed standards of construction and protection. Risks below standards earn a charge that increases the rate; risks above earn a credit that reduces the rate.
Class rating
A rating approach that uses rates that reflect the average probability of loss for businesses within large groups of similar risks; the predominant method used for rating commercial properties.
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An additional charge included in an insurance rate to reflect a hazard not contemplated in the basic rate for the class.
Acquisition cost
The cost of putting business on the books and acquiring the premium. The items involved are not standard with all insurers, but generally may include such items as agents’/brokers’ commissions, field representatives’ costs, premium tax, and perhaps some of the relevant head office acquisition costs of operation.
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.
Commission
Compensation based upon 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.
Ratemaking
The process of compiling and analyzing data to establish rates that accurately reflect the level of risk. Usually performed by actuaries.
Automobile Statistical Plan (ASP)
A collection of statistical information that all automobile insurers who write business in Canada must record and file as prescribed by the superintendents of insurance. Commonly known as the Green Book.
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.
