Teng and Perkins

Question 1

Premium asset

Answer 1

For retro policies, the premium that insurer expects to collect based on expected ultimate loss experience (less already booked)

Question 2

Standard premium

Answer 2

Manual premium adjusted for emod

Question 3

Premium deviation

Answer 3

Amount by which booked premium differs from standard premium

Question 4

Retro reserve

Answer 4

Difference between premium deviation to date and ultimate premium deviation

Question 5

Three advantages of retro rated policies

Answer 5

1) Encourage loss control by returning premium
2) Cash flow advantage (pay premium with losses)
3) Shifts a large portion of risk to insured

Question 6

One advantage of using retro formula to estimate PDLD

Answer 6

Responds to changes in retro rating parameters that are sold

Question 7

Disadvantage of using retro formula to estimate PDLD

Answer 7

Potential bias exists since approach uses average parameters for LCF, TM, maximum, minimum, and per accident limitation

Question 8

Two types of data needed to calculate PDLD ratios empirically

Answer 8

Booked premium development

Reported loss development

Question 9

How to segregate data for empirical PDLD ratios

Answer 9

Homogenous groups by size of account and type of rating plan sold

Question 10

Organizational differences between premiums and losses

Answer 10

Premiums and losses should be organized into twelve month intervals. Premiums should lag losses by nine months to account for time to process and record adjusted premiums

Question 11

Why might historical and formula PDLD ratios diverge

Answer 11

Worse than expected loss experience may cause larger portion to be outside the boundaries of retro maximum. In addition, average retro parameters may be changing over time

Question 12

How negative PDLD ratios can occur

Answer 12

Upward development in layers resulting in no additional premium and downward development in layers within loss limitations

Question 13

Three reasons why current booked premiums may not equal booked premium for prior retro adjustment

Answer 13

Timing of retro adjustments
Minor premium adjustments
Interim premium booking that occurs between regularly scheduled retro adjustments

Question 14

Why PDLD method is preferable to using CL method on historical premium triangles when determining premium asset

Answer 14

Lag in processing and recording retro premium makes CL unusable until nine months after policy expiration. PDLD method can create initial estimate of premium asset sooner

Question 15

How premium responsiveness changes with:

1) Maturity of book
2) Loss ratio

Answer 15

1) Book matures, responsiveness declines

2) Higher loss ratios, responsiveness declines

Question 16

Two assumptions underlying PDLD

Answer 16

1) Premium responsiveness during subsequent adjustments is independent of prior adjustments
2) Slope of line segment depends on time period, not on beginning loss ratio or beginning retro premium ratio

Question 17

How PDLD assumptions fix issues underlying Fitzgibbon’s method

Answer 17

Fitzgibbon relates ultimate LR to ultimate retro ratio, which can get off track if actual experience deviates; PDLD picks up where it left off

Question 18

Two problems that arise from failure to separate basic premium ratio from first PDLD ratio (and its solution)

Answer 18

1) Cannot tell how much each item contributes to total slope of first segment
2) Harder to analyze changes over time
Solution) Subtract average basic premium charge from CPDLD ratio