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Exam 7 > Teng & Perkins > Flashcards

Teng & Perkins Flashcards

1
Q

Reasons for popularity of retrospective rated policies (3)

A
  1. attracts preferred customers - encourages loss control through returned premiums for good loss experience
  2. cash flow advantages b/c premiums are paid as losses are reported
  3. shifts a large portion of the risk to insured
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2
Q

Premium asset

A

= expected ultimate premium - current booked premium

OR sum of expected future retro adjustments

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3
Q

Formula for premium at the nth rating adjustment

A

P_n = ( BP + ( CL * LCF ) ) * T

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4
Q

First PDLD ratio using the retro formula approach

A

P1/L1 = ( BP / L1 ) * T + CL * LCF * tax multiplier

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5
Q

Approximation for loss at time n

A

L(n) = standard premium * ELR * % loss emerged at time n

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6
Q

Interpretation of the cumulative loss capping ratio and portion of losses outside bounds of retro min and max

A

( 1 - cumulative loss capping ratio ) % of losses developed through the nth rating adjustment are eliminated by the retro max, retro min, and per accident limits

portion of loss outside retro min and max bounds = capped losses - uncapped losses

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7
Q

Subsequent PDLD ratios using the retro formula approach

A

= change in premiums / change in losses

= incremental loss capping ratio * LCF * tax multiplier

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8
Q

Incremental loss capping ratio

A

= ( capped loss at time 2 - capped loss at time 1 ) / ( uncapped loss at time 2 - uncapped loss at time 1 )

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9
Q

Advantages of the retro formula approach for calculating PDLD ratios (2)
(Teng and Perkins)

A
  1. responds to changes in retro rating parameters sold
  2. PDLD ratios are more stable
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10
Q

Disadvantages of the retro formula approach for calculating PDLD ratios (2)
(Teng and Perkins)

A
  1. potential bias exists because average retro rating parameters are used
  2. does not reflect changes in loss experience
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11
Q

Data required for the empirical approach to calculating PDLD ratios and explanation of lag (2)

A
  1. booked premium development (27 months)
  2. reported loss development (18 months)

annual subsequent evaluations
lag is due to delay in processing and recording retro adjustments

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12
Q

PDLD ratios (first and subsequent) using the empirical approach

A

1st PDLD ratio = cumulative booked premium / cumulative reported losses

subsequent PDLD ratios = change in booked premiums / change in reported losses

** calculate triangle of factors and select average at each retro adjustment

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13
Q

Reasons for an upward trend in PDLD ratios (2)

A
  1. more liberal retro rating parameters sold (more losses covered by premiums)
  2. improvement in loss experience (larger portion of loss w/in retro boundaries)
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14
Q

Reasons historical PDLD ratios may fluctuate significantly after 1st adjustment (3)

A
  1. premium or loss development on a few policies can drive total incremental development
  2. significant upward development in high loss layers results in no additional premium
  3. downward development on layers w/in loss limits can result in returned premium

> > 2 and 3 mean negative PDLD ratios are possible

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15
Q

How to respond if there are large fluctuations in historical PDLD ratios (2)

A
  1. average as many historical points as possible

2. use the retro formula approach

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16
Q

Reasons PDLD ratios calculated using the retro formula and empirical approaches could diverge (2)

A
  1. avg retro parameters are changing over time
  2. worse (better) than expected loss experience can cause a larger portion of loss to be outside (inside) retro/per accident bounds than predicted
17
Q

Cumulative PDLD ratio

A

weighted average with weights = incremental % emerged

18
Q

Interpretation of the cumulative PDLD (CPDLD) ratio

A

amount of premium insurer can expect to collect per dollar of loss yet to emerge

19
Q

Reasons the CPDLD ratio is usually greater than 1 at the first adjustment (3)

A
  1. 1st retro premium includes the basic premium
  2. small portion of loss limited at early maturities
  3. LCF and tax multiplier result in more than a dollar of premium per dollar of loss
20
Q

Expected future premium

A

expected future premium = CPDLD ratio * expected future loss

21
Q

Ultimate premium

A

ultimate premium = expected future premium + booked premium from prior adjustments

22
Q

Reasons that current booked premium may not = booked premium from prior adjustments (3)

A
  1. differences in timing of retro adjustments
  2. minor premium adjustments
  3. interim premium booking b/w regularly scheduled retro adjustments
23
Q

Advantages of the PDLD method (3)

Feldblum

A
  1. easy to explain b/c it is modeled directly on retro rating formula
  2. emphasis on premium responsiveness parallels RBC loss-sensitive contract offset in UW risk charges and loss-sensitive contract in part 7 of schedule P
  3. useful when retro rating parameters adjust indications from other methods
24
Q

What is covered in the basic premium (2)

A
  1. UW and acquisition expenses

2. insurance charge and excess loss charge

25
Q

Description of Fitzgibbon’s method and Berry’s adjustment

A

plots retro premium against incurred loss (both as % of standard premium)

y = A + Bx where A = basic premium % and B = premium responsiveness

Berry adds a credibility weighting for actual experience

26
Q

Problem with Fitzgibbon’s method

A

ignores actual experience

27
Q

Teng and Perkins’ graph and Feldblum’s enhancement

A

Teng and Perkins - retro premium against incurred losses (both as % of standard premium) series of line segments with decreasing slope that passes through the origin*

Feldblum - removes avg basic premium so graph has an intercept at the basic premium amt

28
Q

What slope represents and why line segments have decreasing slopes in Teng and Perkins/Feldblum graphs

A

slope = premium responsiveness

decreases over time because a larger percent of loss is excluded from rating due to loss limits and maximum premiums

Exam 7 (20 decks)

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