Teng & Perkins Flashcards
Define premium asset
For retrospectively rated policies, this represents the premium that the insurer expects to collect based on the expected ultimate loss experience, less the premium that the insurer has already booked
Define standard premium
Manual premium adjusted for experience rating
Define premium deviation
Amount by which the booked premium differs from the standard premium
Define retro reserve
The difference between the premium deviation to date & the ultimate premium deviation
Provide three advantages of retrospectively rated policies
-They encourage loss control & loss management by returning premium to the insured for good loss experience -They offer a cash flow advantage to insureds by allowing them to pay premium as losses are reported or paid -Since premium varies directly with the insured’s actual loss experience, it shifts a large portion of the risk to the insured
Briefly describe two methods for calculating the retro reserve
-Method 1: Analyze the historical relationship between the loss ratio and the premium deviation and apply that relationship to the projected ultimate premium deviation. Then subtract the premium deviation to date from the ultimate premium deviation to produce the retro reserve. -Method 2: Estimate ultimate premium using the historical premium emergence pattern, and then subtract current premium to get the retro reserve.
Provide one advantage of using the retro formula to estimate the PDLD ratio
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 the PDLD ratios derived from the formula than those derived from historical data.
Provide one disadvantage of using the retro formula to estimate the PDLD ratio
Potential bias exists since the formula approach uses the average parameters for the LCF, TM, Max, Min & per accident limitation. We should retrospectively test PDLD ratios against actual emergence to check for bias.
Identify two types of data needed to calculate the PDLD ratios empirically
-Booked premium development -Reported loss development
Briefly explain how this data should be segregated (data for PDLD ratios)
Data should be segregated into homogenous groups by size of account & type of rating plan sold
Briefly explain any organization differences between premium & losses
Premiums & losses should be organized into 12 months intervals. In addition, premiums should lag losses by 9 months to account for the time it takes to process & record adjusted premiums.
Explain why historical & formula PDLD ratios may diverge
Worse (better) than expected loss experience may have caused a larger portion of the loss to be outside (inside) the boundaries of the retro max & the per accident limitation than the formula approach predicted. In addition, average retro parameters may be changing over time.
Explain how negative PDLD ratios can occur
Upward development in high loss layers (resulting in no additional premium) & downward development in layers within loss limitations (resulting in return premiums)
Identify three reasons why the current booked premiums may not equal the booked premium for the prior retro adjustment
-The timing of retro adjustments -Minor premium adjustments -Interim premium booking that occurs between the regularly scheduled retro adjustments
Fully describe why the PDLD method is preferable to using the CL method on historical premium triangles when determining the premium asset
Due to the lag in processing & recording retro premium adjustments, a chain-ladder estimate of the premium asset is not available until at least 9 months after the policy expiration & it can be updated only annually thereafter. Using the PDLD method, an initial estimate of the premium asset can be produced soon after the policy expires, using the known loss information & the relationships between the incurred losses & retro premium. In addition, the premium asset estimate can be updated each quarter as new loss data becomes available.
Briefly describe how premium responsiveness changes with the maturity of the book
As a book of business matures, premium responsiveness on loss-sensitive contracts declines
Briefly describe how premium responsiveness changes with the loss ratio
At higher loss ratios, premium responsiveness on loss-sensitive contracts declines
Describe two assumptions underlying the PDLD method
Explain how the PDLD assumptions fix the issues underlying Fitzgibbon’s method
One issue with the PDLD method is the failure to separate the basic premium ratio from the first PDLD ratio. Fully describe two problems that arise from the failure to separate these two items.
- One problem with combining these items is that we cannot tell how much each item contributes to the total slope of the first line segment. This leads to results that are unclear and difficult to interpret. For example, we would normally interpret a CPDLD ratio of 1.492 at policy inception to the first retro adjustment to mean that each dollar of loss emerged provides the insurer one dollar and 49 cents of premium. This would be wrong becaues part of that 1.492 comes from the basic premium charge, which does not represent emerged losses.
- The failure to distinguish these items also makes it harder to analyze changes over time. For example, assume the slope of the first line segment has risen steadily over the past 30 years. Is this due to a change in the average basic premium ratio, a change in premium responsiveness during the first period, or a lengthening of the loss reporting pattern?
One issue with the PDLD method is the failure to separate the basic premium ratio from the first PDLD ratio. Briefly describe a solution to the problem.
Subtract the average basic premium charge (as a ratio to the standard loss ratio) from the 1st CPDLD ratio
Retrospective Premium Formula
Formula for PDLD1
Derive PDLD1
Formula for PDLDn : n > 1
Formula for CPDLD5
According to Feldblum - What major improvements
did Teng & Perkins make?
-The ratio of Premium to Losses reduces as the year develops
-Premium Development is based on projected Unreported Losses, not paid to date
– Thus any errors in projecting premium to date are automatically corrected for
