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Exam 7 > Teng & Perkins > Flashcards

Teng & Perkins Flashcards

1
Q

Premium asset

A

premium that insurer expects to collect based on expected ultimate loss experience – prem insurer has already booked = EBNR

*in order to calc, must determine how premiums develop as losses develop -> PDLD ratio

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2
Q

retro reserve

A

retro reserve = -(prem asset)

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3
Q

once relationship between prem and loss isdetermined, can

A

be applied to expected future loss development to obtain expected future prem development

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4
Q

premium formula

A
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5
Q

PDLD1 formula

A
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6
Q

cumulative loss capping ratio

A
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7
Q

what are capped losses

A

-losses that contribute to additional premium (> retro min and < retro max)

-diff between capped and uncapped loss can be viewed as portion of losses outside boundaries of retro min and max

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8
Q

why does loss capping ratio decrease as data becomes more mature

A

since increasing proportion of loss development occurs outside of limitations

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9
Q

PDLD2: what it refers to and formula

A

2nd PDLD refers to incremental prem developed between 1st and 2nd retro adj divided by increm loss developed between 1st and 2nd

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10
Q

advantage of using retro formula to estimate PDLDs

A

-responds to/reflects changes in retro rating parameters that are sold & more stable than those from empirical data

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11
Q

If parameters change significantly over time,

A

more weight should be given to PDLD ratios derived from formula than hist data

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12
Q

disadvantage to using retro formula and what should you do to test for this

A
  • dis = potential bias exists since formula uses average parameters for LCF, TM, max, min, and per accident limitation
  • >Should retrospectively test PDLD ratios against actual emergence to check for bias
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13
Q

empirical approach for PDLD

A
  • need booked premium and reported loss development
  • 1st retro prem computation is based on losses development through 18 months and premium booked through 27 months
  • premium lag of 9 months is assumed
  • subsequent retro adj would occur in annual intervals
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14
Q

why historical PDLD ratios may fluctuate significantly after 1st retro adj

and what should you do?

A
  • prem and loss development on few policies may drive total increm development
  • should take average over as many policy periods as possible but pay attention to any trends in PDLD ratios over time
  • could also use PDLD ratio calculated from retro formula
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15
Q

upward trend in PDLD

A
  • more liberal retro rating parameters such as higher max, min or per accident limitation
  • improvement in loss experience resulting in larger portion of losses being within boundaries of retro max and per acc limitation
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16
Q

Historical and formula PDLD ratios could diverge

A
  • worse or better than expected loss experience may have caused larger portion of loss to be outside or inside boundaries
  • average retro parameters may be changing over time
17
Q

How could you have positive adjustment?

A

-losses occurring within loss limits

18
Q

How could you have 0 adj with increm loss?

A

-all development occurred outside of loss limits

19
Q

How could you have neg adj with incremental loss?

A

-losses on claims below loss limits decreased and losses on claims above loss limits increased; if increase in above cap > decrease in losses below cap, then increm prem would drop despite increm loss

20
Q

cumulative PDLD

A
  • CPDLD ratio is average of PDLDs in all subsequent retro period weighted by percentage of losses to emerge in each period
  • CPDLD tells insurer how much prem they can expect to collect for each of dollar of loss that has yet to emerge
21
Q

what do you need to calc to estimate the premium asset

A

cumulative PDLD ratios

22
Q

CDPLD @ 1st adj normally > 1

A

First retro prem calc includes BP

Only small portion of loss is limited at this point

Application of LCF and TM results in more than $1P per $1L

23
Q

at subsequent adjs, CPDLD ratio should be less than 1 due to

A

retro max and per accident limitation

24
Q

to get future premium

A

CPDLD * expected future loss emergence

future losses = ult loss – loss reported at prior adj for each PY

25
Q

CPDLD formulas

A
26
Q

premium asset formula

A

prem asset = expected future prem + prem booked from prior adj – prem booked to date

27
Q

retro prem composed of 2 parts

A
  1. Covers incd loss, LAE, state taxes, and other state assessments = LCF*limited incd loss *TM (LCF mostly covers LAE)
  2. Covers company expenses, insurance charge, state taxes, and other state assessments = (expense provision + ins charge + excess loss charge)*TM

Combine these to get BP*TM

28
Q

insurance charge is

A

difference between expected loss to insurer caused by max retro prem and expected gain caused by min

29
Q

as BoB matures, prem responsiveness

A

declines

as time goes by, more losses should be capped by max prem and loss limit

30
Q

at higher LR, prem responsiveness

A

declines

31
Q

Push to settle small claims impact on PDLD

A

-settling small claims faster will increase both losses and capped losses by same amount -> earlier PDLD ratios will be high because each claim will create add. prem but at later maturities, larger claims will be above cap and will not create add. prem -> PDLD line segment will start steeper but become flatter faster

32
Q

Why not estimate the accrued retro premium asset using CL on historical triangles of either collected premium or billed premium?

A

-Due to the lag in processing and recording retro premium adjustments, CL estimate of the premium asset is not available until at least 9M after the policy expiration, and it can be updated only annually thereafter

33
Q

Using Fitzgibbon’s method or PDLD, an initial estimate of the premium asset can be produced

A

soon after the policy expires, using the known loss information and the relationships between incurred losses and retro premium

-premium asset estimate can be updated each quarter as new loss data becomes available

34
Q

reported losses vs retrospective premium graphs: problem with first line segment

A

*by going through origin, combine basic premium ratio and slope of first line segment

  • problem = we cannot tell how much each item contributes to total slope of first line segment and basic premium does not represent emerged losses
  • Feldblum says it should be intercept where b=CPDLD1-avg basic prem charge (as ratio to standard loss ratio)
35
Q

transform cumulative loss capping ratios to incremental loss capping ratios

A
36
Q

total retrospective premium asset using enhanced PDLD method as described by Feldblum

A

*only CPDLD1 changes

*ultimate prem for PY @ 1st retro adj = expected future prem from loss + basic prem portion for 1st Adj

no prem booked at prior adjustment since this is 1st adj

enhanced PDLD changes ultimate prem by taking basic prem portion out of CPDLD1

37
Q

why does enhanced method produce lower premium asset?

A

ultimate reported loss is lower than a priori expected ultimate loss calculated with standard premium and ELR

38
Q

be clear on the exam about loss capping ratios

A

clearly state if you are using incremental or cumulative loss capping ratios is problem is not explicit

ie say you assume they are giving you incremental info

Exam 7 (19 decks)

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