Teng and Perkins

Question 1

Benefits of Retrospectively Rated Policies

Answer 1

• Rewards good loss control and loss maangement. Policyholders can receive Premium refunds for good experience
• Policyholders can experience cash flow benefits - rather than paying the full premium upfront, they can pay premiums gradually as losses develop
• Insurers may be more willing to write retrospectively rated policies because risks due to inflation, rate regulation, legal involvement

Question 2

Retrospective Premium Formula

Retrospective Premium Formula

And components

Answer 2

= [basic premium + (capped incurred loss * LCF)] * tax multiplier

Capped Incurred Loss & LCF
* Coveres incurred losses and expenses up to the per accident limit
* LCF covers the LAE

Basic Premium
* Expense Provision - UW and acquisition expense
* Excess loss charge - accounts for risks that losses will exceed the per accident loss limit
* Insurance charge

Question 3

Retro Rating Parameters Pros and Cons

Answer 3

Advantages
* Premium development to loss development (PDLDs) tend to be more stable than those estimated using historical data
* Any changes in rating parameters are accounted –> better aligns with the policies that are currently being written

Disadvantages
* Rating parameters cannot be averaged across all segments of the business as this can introduce bias