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Exam 7 by Liya > Teng & Perkins > Flashcards

Teng & Perkins Flashcards

1
Q

reasons to purchase retro policies

A
  1. They encourage loss control and loss management by returning premium to the insured for good loss experience; this is great for the insurer as well because it attracts preferred customers
  2. They offer a cash flow advantage to insureds by allowing them to pay premium as losses are reported or paid
  3. Since premium varies directly with the insured’s actual loss experience, it shifts a large portion of the risk to the insured; this is great for the insurer due to increasing difficulty in predicting the cost of insurance
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2
Q

Advantage of using the retro formula approach

A

it responds to changes in the retro rating parameters that are sold. If retro parameters change significantly over time, more weight should be given to PDLF ratios derived from the formula than those derived from historical data

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3
Q

Disadvantage of using the retro formula

A

Potential bias exists since the formula approach uses the average parameters for the LDF, tax multiplier, maximum, minimum and per accident limitation. We should retrospectively test PDLD ratios against actual emergence to check for bias

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4
Q

two types of data needed for the empirical approach

A
  1. Booked premium development
  2. reported loss development
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5
Q

What does an upward trend in the PDLD ratios indicate

A
  1. more liberal retro rating parameters (change in retro parameters being sold), such as a higher maximum, minimum or per accident limit
  2. Improvement in loss experience, resulting in a larger portion of loss being within the boundaries of the retro maximum and the per accident limitation (which drives additional premium)
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6
Q

Why historical PDLD ratios may fluctuate significantly after the first retro adjustment

A
  1. Premium and loss development on a few policies can drive total incremental development on quarterly data
  2. Negative PDLD ratios are possible - upward development in high loss layers (resulting in no additional premium) and downward development in layers within loss limitations (resulting in return premium).
    If large fluctuation exists, average as many historical points as possible OR use the formula approach
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7
Q

Historical and formula PDLD ratios could diverge for a number of reasons

A
  1. Worse (better) than expected loss experience may have caused a large portion of the loss to be outside(inside) the boundaries of the retro maximum and the per accident limitation than the formula approach predicted
  2. Average retro parameters may be changing over time
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8
Q

What is CPDLD ratio

A

It tells an insurer how much premium it can expect to collect for a dollar of loss that has yet to emerge

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9
Q

The CPDLD ratio at the first retro adjustment is usually greater than 1

A
  1. First retro premium computation includes the basic premium
  2. Only a small portion of loss is limited at this point
  3. The application of the LCF and TM results in more than a dollar of premium per dollar of loss
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10
Q

Reasons that the current booked premiums are different from the booked premium from the prior retro adjustment

A
  1. The timing of retro adjustments
  2. Minor premium adjustments
  3. Interim premium booking that occurs between the regularly scheduled retro adjustments
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11
Q

advantage of PDLD method

A
  1. Modeled directly on the retro rating formula, making it easy to explain
  2. Emphasis on premium sensitivity in the retro formula parallels the risk-based capital loss-sensitive contract offset in the underwriting risk charges and the loss-sensitive contract Part 7 of Schedule P
  3. Method is useful when changes in the retro rating plan parameters distort the indications of other methods
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12
Q

Why not estimate the accrued retro premium asset using a chain-ladder development procedure on historical triangles of either collected or billed premium

A
  1. Due to the lag in processing and recording retro premium adjustments, a chain-ladder estimate of the premium asset is not available until at least 9 months after the policy expiration, and it can be updated only annually thereafter.
  2. Using Fitzgibbon’s method or PDLD method, an initial estimate of the premium asset can be produced soon after the policy expires, using the known loss information and the relationships between incurred losses and retro premium
  3. The premium asset estimate can be updated each quarter as new loss data becomes available
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13
Q

Difficulties with regression (Y=A+Bx)

A
  1. regression performed on historical data may not apply to current policies due to changes in rating plan factors and aggregate loss ratios
  2. Premium on individual plans is not a simple linear function of total incurred losses (losses are capped)
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14
Q

Fitzgibbon’s plot

A

Plots net earned premium (retrospective premiums as % of SP) against incurred losses as % of SP.
Y=A+Bx
A = basic premium percentage (net premium / SP)
B = premium responsiveness.
The graph forms a straight line

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15
Q

reasons why the premium responsiveness (B) is not 1

A
  1. Loss limitations (retro maximum, per accident limitations)
  2. Minimum premium exceeds the basic premium
  3. A LCF and TM are applied to the incurred losses, which changes the shape
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16
Q

Describe “swing” of the Fitzgibbon plan

A

For plans with narrow swing (small accounts), B<1, meaning low loss limits and maximum premiums.
For plans with wide swing (large accounts), B>1, meaning high loss limited and maximum premiums

17
Q

Problem with Fitzgibbon plan

A

It ignores emerging experience, which may differ from what is expected.
-A and B are estimates. They may vary from year to year
- Premium responsiveness may be less than expected due to large losses on individual policies
- If the true B is less than the estimate of B shown in the graph, then this method will overstate the retro premium

18
Q

Berry’s solution to Fitzgibbon’s method

A

Use a method that relies on actual experience.
Berry begins with Fitzgibbon’s method and then gradually give more weight to actual experience as the book of business matures

19
Q

2 interpretations of Fitzgibbon’s graph Y = A+BX

A
  1. relates the ultimate loss ratio and the ultimate retro premium ratio among different books of business or different years (Fitzgibbon) This is shown as a straight line
  2. Relates the reported loss ratio and the net EP at different points of time for a single book of business (Teng & Perkins). this is shown as a set of line segments with decreasing slope as we move to the right, each slope is PDLD)
20
Q

2 general roles of Teng & Perkins graph

A
  1. As a book of business matures, premium responsiveness on loss-sensitive contracts declines. (as policies mature, a greater percentage of policies are excluded from retro rating by the maximum premium and by the loss limit)
  2. At higher loss ratios, premium responsiveness on loss sensitive contracts declines. (At higher overall loss ratios, more policyholders have reached their maximum premiums. This means even a small claim will result in no additional premium)
21
Q

2 Teng and Perkins assumption

A
  1. The premium responsiveness during subsequent adjustments is independent of the premium responsiveness during preceding adjustments.
  2. The slope of the time segment depends on the time period, not on the beginning loss ratio or the beginning retro premium ratio (when we change from one line to another)
22
Q

How are the two Teng and Perkins assumptions fix the issues in Fitzgibbon’s method

A
  • Fitzgibbon relates the ultimate loss ratio to the ultimate retro premium ratio. If actual experience deviates from what is expected, we have no way to get back on track
  • The PDLD ratio relates the reported loss ratio to the retro premium ratio. If actual experience deviates from what is expected, the next line segment begins at a starting point that corresponds to actual experience
23
Q

Teng and Perkins assume that the first line segment passes through the origin, they are combining two separate items into the slope of the first line segment (basic premium ratio and PDLD1). What’s the problem with this

A
  1. We cannot tell how much each item contributes to the total slope of the first line segment
  2. Combining these items leads to confusing interpretation
24
Q

Reasons that it’s difficult to use retro rating parameters from pricing

A
  1. Different insureds have policies with different retro rating parameters
  2. Premium taxes differ between states
  3. Basic premium may vary over time

Exam 7 by Liya (15 decks)

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