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exam 7 > Teng & Perkins > Flashcards

Teng & Perkins Flashcards

1
Q

what does a premium asset represent (for retro-rated policies)?

(Teng/Perkins)

A

premium that the insurer expects to collect based on the expected ultimate loss experience, less the premium that the insurer has already booked

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2
Q

what is the premium asset also known as?

Teng/Perkins

A

earned but not reported premium (EBNR)

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3
Q

what are three reasons that retro policies are popular?

Teng/Perkins

A
  • encourage loss control and loss management
  • offer cash flow advantage to insureds
  • shifts large portion of risk to the insured
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4
Q

how do retro policies encourage loss control and loss management?

(Teng/Perkins)

A

returns premium to the insured for good loss experience

good for insurer bc attracts preferred customers

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5
Q

how do retro policies offer a cash flow advantage to insureds?

(Teng/Perkins)

A

allow them to pay premium as losses are reported or paid

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6
Q

how do retro rated policies shift a large portion of risk to the insured?

(Teng/Perkins)

A

premium varies directly with the insured’s actual loss experience
(great for insurer due to increasing difficulty in predicting the cost of insurance)

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7
Q

how is “retro reserve” defined?

Teng/Perkins

A

difference between the premium deviation to date and the ultimate premium deviation

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8
Q

what is premium deviation?

Teng/Perkins

A

amount by which the booked premium differs from the standard premium

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9
Q

what is standard premium?

Teng/Perkins

A

manual premium adjusted for experience rating

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10
Q

what can the retro reserve be thought of as?

Teng/Perkins

A

negative equivalent of the premium asset

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11
Q

what is the first method that Berry and Fitzgibbon offer for calculating the retro reserve?

(Teng/Perkins)

A
  • analyze historical relationship between LR & prem. deviation
  • apply relationship to projected LR to determine projected ult. prem. deviation
  • subtract prem. deviation to date from ultimate prem. deviation to produce retro reserve
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12
Q

what is the second method that Berry and Fitzgibbon offer for calculating the retro reserve?

(Teng/Perkins)

A
  • estimate ult. prem using historical premium emergence pattern
  • subtract current premium to get the retro reserve
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13
Q

what is the PDLD ratio?

Teng/Perkins

A

ratio of how premiums develop as losses develop

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14
Q

what are capped losses? (when calculating PDLD ratios for retro-rated policies?

(Teng/Perkins)

A

losses that contribute to additional premium

any total loss that exceeds the retro minimum and is below the maximum

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15
Q

what can the difference between the capped loss and uncapped loss be viewed as?

(Teng/Perkins)

A

portion of loss outside the boundaries of the retro min. and max.

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16
Q

how does the loss capping ratio change as data matures?

Teng/Perkins

A

decreases at data becomes more mature

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17
Q

why does the loss capping ratio decrease as data matures?

Teng/Perkins

A

increasing portion of the loss development occurs outside of loss limitations

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18
Q

what does the second PDLD ratio refer to?

Teng/Perkins

A

INCREMENTAL premiums developed between the first and second retro adjustments, divided by the INCREMENTAL losses developed between these two adjustments
(ie - chg in prem / chg in loss)

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19
Q

what is an advantage of using the retro formula to estimate the PDLD ratio?

(Teng/Perkins)

A

-responds to changes in retro params that are sold

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20
Q

what adjustments should be made to the PDLD ratio calculation if retro params change significantly over time?

(Teng/Perkins)

A

-more weight should be given to PDLD ratios derived from the formula than those derived from historical data

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21
Q

what is a disadvantage of using the retro formula to estimate the PDLD ratio?

(Teng/Perkins)

A

potential bias exists, since the formula approach uses the average params for the LCF, tax multiplier, max, min, and per accident limitation

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22
Q

what two types of data are needed for the empirical PDLD approach?

(Teng/Perkins)

A
  • booked prem dev.

- reported loss dev

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23
Q

how should data be segregated when using the empirical PDLD approach?

(Teng/Perkins)

A

-segregated into homogeneous groups by size of account and type of rating plan sold

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24
Q

how are policies grouped over time?

Teng/Perkins

A

grouped based on calendar quarter in which they became effective
(policy effective quarter)

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25
Q

what age loss and premium is the first retro premium computation based on?

(Teng/Perkins)

A
  • losses developed through 18 months

- premium booked through 27 months

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26
Q

why is a premium lag of 9 months assumed?

Teng/Perkins

A

it takes time to process and record adjusted premiums

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27
Q

when do subsequent retro adjustments occur?

Teng/Perkins

A

in annual intervals

e.g. losses at 30 mo., prem at 39; losses at 42 mo, prem at 51 mo.

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28
Q

what is the first empirical PDLD ratio defined as?

Teng/Perkins

A

prem booked through 27 mo divided by losses reported through 18 mo

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29
Q

what is the second empirical PDLD ratio?

Teng/Perkins

A

-change in prem / change in loss –>

prem at 39 mo - prem at 27 mo) / (loss at 30 mo - loss at 18 mo

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30
Q

why might historical PDLD ratios fluctuate significantly after the first retro adjustment?

(Teng/Perkins)

A
  • prem and loss dev. on a few policies can drive total incremental dev. on quarterly data
  • negative PDLD ratios are possible
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31
Q

how might negative PDLD ratios occur?

Teng/Perkins

A

-upward dev. in high loss layers (resulting in no add’l prem) AND downward dev. in layers within loss limitations (resulting in return prem)

32
Q

how can we handle large fluctuation in empirical PDLD ratios?

(Teng/Perkins)

A
  • average as many historical points as possible

- use formula approach

33
Q

what are two reasons that historical and formula PDLD ratios could diverge?

(Teng/Perkins)

A
  • 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 and the per accident limitation than the formula approach predicted
  • average retro params may be changing over time
34
Q

what is a CPDLD ratio? (calculation/formula explanation)

Teng/Perkins

A

average of the PDLD ratios in all subsequent retro periods (including the current adj. period), weighted by the percentage of losses to emerge in each period

35
Q

what does the CPDLD ratio mean?

Teng/Perkins

A

tells an insurer how much prem it can expect to collect for a dollar of loss that has yet to emerge
(e.g.: if CPDLD ratio = 1.63, then each dollar of loss emerged provides insurer 1.63 prem)

36
Q

why is the CPDLD ratio at the first retro adjustment normally greater than 1.0?

(Teng/Perkins)

A
  • first retro prem computation includes basic prem
  • only a small portion of loss is limited at this point
  • application of loss conversion factor and tax multiplier results in more than a dollar of prem per dollar of loss
37
Q

why is the CPDLD ratio less than 1.0 at subsequent adjustments?

(Teng/Perkins)

A

-retro max and per accident limitation limit losses

38
Q

why are the current booked premiums different than the booked premium from the prior retro adjustment?

(Teng/Perkins)

A
  • timing of retro adjustments
  • minor prem. adjustments
  • interim premium booking that occurs between the regularly-scheduled retro adjustments
39
Q

what are three possible issues when calculating the CPDLD or PDLD ratios?

(Teng/Perkins)

A
  • definition of loss may include LAE
  • changes in mix of business by state, industry group, or geographical region may change the PDLD ratio
  • collectibility of prem should be considered
40
Q

how do we prevent issues from LAE being included with loss?

Teng/Perkins

A

-make sure data used in computing PDLD ratios is consistent with that used in the rating plan

41
Q

how would we handle changes in the mix of business by state, industry group, or geographical region?

(Teng/Perkins)

A

-can alter average rating params sold and the underlying claim frequency and severity

42
Q

what might we do when considering collectibility of premium?

Teng/Perkins

A

-if portion of premium asset is not secured, a provision should be made to anticipate bad debt

43
Q

what are three advantages of the PDLD method?

Teng/Perkins

A
  • modeled directly on the retro rating formula - easy to explain
  • emphasis on premium sensitivity in retro formula parallels the RBC loss-sensitive contract offset in Part 7 of the Schedule P
  • useful when changes in retro rating plan params distort the indications of other methods
44
Q

why not estimate the accrued retro premium asset using a CL development procedure on historical triangles of either collected or billed prem?

(Teng/Perkins)

A

-lag in processing and recording retro prem. adj -> CL estimate is not available until at least 9 months after policy expiration, can only be updated annually after
[Fitzgibbon or PDLD methods can produce estimates sooner, and can update each quarter with new loss data]

45
Q

what two parts is the retro prem composed of?

Teng/Perkins

A
  • part covers incurred losses, LAE, state taxes, and other assessments
  • other part covers company expenses (UW, acquisition), net insurance charge (results for max/min), state taxes, other state assessments
46
Q

how is the part of retro prem covering losses, LAE, taxes, and state assessments expressed?

(Teng/Perkins)

A

loss conversion factor x limited incurred losses x tax multiplier

47
Q

how is the part of retro prem covering company expenses, net insurance charge, state taxes, and other state assessments expressed?

(Teng/Perkins)

A

[expense provision + net insurance charge + excess loss charge] x tax multiplier

48
Q

what components are included in the basic premium?

Teng/Perkins

A

-company expenses, net insurance charge, excess losse charge

49
Q

what is the net insurance charge?

Teng/Perkins

A

difference between:

  • expected loss to insurer caused by maximum retro premium AND
  • expected gain to insurer caused by minimum retro premium
50
Q

how do Fitzgibbon and Berry estimate average parameters A and B?

(Teng/Perkins)

A

from a historical regressions using standard loss ratios and retro adj. from mature policy years

51
Q

why must we use regression to estimate A and B instead of using pricing actuarial estimates?

(Teng/Perkins)

A
  • actuarial reserves are estimated on aggregate basis, but plan params vary from:
  • -year to year (interest rates/investment income)
  • -state to state (prem taxes)
  • -plan to plan (smaller insured may choose lower max prem)
52
Q

what are difficulties with regression?

Teng/Perkins

A
  • regression performed on historical data may not apply to current policies due to changes in rating plan factors and aggregate loss ratios
  • prem on individual plans is not a simple linear function of total incurred losses (losses are capped)
53
Q

how is Fitzgibbon’s method graphically represented?

Teng/Perkins

A

-plots net EP (after retro adj.) against incurred losses, both as % of standard premium

54
Q

what line/params does the graphical representation of Fitzgibbon’s method result in?

(Teng/Perkins)

A

-straight line, Y = A + B*X
where:
-A = basic premiumg percentage (net prem / standard prem)
-B = premium responsiveness

55
Q

what are reasons that B != 1 when graphing Fitzgibbon’s method? [B: prem. responsiveness to loss]

(Teng/Perkins)

A
  • loss limitations (retro max, per accident limitation)
  • minimum premium exceeds basic premium
  • LCF and TM are applied to incurred losses
56
Q

what does “swing” of the plan mean?

A
  • narrow swing = B < 1 -> low loss limits and max. prems

- wide swing = B > 1 -> high loss limits and max prems

57
Q

what type of accounts tend to have narrow/wide swing?

Teng/Perkins

A
  • narrow: small accounts

- wide: large accounts

58
Q

what is the problem with the Fitzgibbon graphical method?

Teng/Perkins

A

-ignores emerging experience, which may differ from what is expected in terms of premium responsiveness

59
Q

how might emerging experience differ from what is expected when trying to graphically represent the Fitzgibbon method?

(Teng/Perkins)

A
  • A and B are estimates - may vary from year to year
  • prem. responsiveness may be less than expected due to large losses on individual policies
  • if true B is less than estimate of B shown on graph - method will overstate retro prem
60
Q

what is Berry’s solution to the problem’s with graphically representing Fitzgibbon’s method?

(Teng/Perkins)

A
  • use a method that relies on actual experience

- begin with Fitzgibbon and then gradually give more weight to actual experience as book of business matures

61
Q

how would you think of the Fitzgibbon graph?

Teng/Perkins

A

movement over time of reported losses, net EP, and reported loss ratio

62
Q

what are two ways to interpret the Fitzgibbon graph of Y = A + B*X?

(Teng/Perkins)

A
  • relates the ult. LR and ult. retro prem. ratio among different books of business or different years (Berry & Fitzgibbon)
  • relates reported LR and net EP at different points of time for a single book of business (Teng/Perkins)
63
Q

what does graphing the Teng/Perkins interpretation look like?

(Teng/Perkins)

A

-set of line segments with decreasing slope as we move to the right

64
Q

why is the slope decreasing on the Teng/Perkins plot?

Teng/Perkins

A

due to loss limits and max prems

65
Q

what are two general rules about the Teng/Perkins plot?

Teng/Perkins

A
  • as a book of business matures, prem. responsiveness on loss-sensitive contracts declines
  • at higher loss ratios, premium responsiveness on loss-sensitive contracts declines
66
Q

why does prem. responsiveness on loss-sensitive contracts decline as a book of business matures?

(Teng/Perkins)

A

as policies mature, greater percentage of policies are excluded from retro rating by the max prem and by the loss limit

67
Q

why does premium responsiveness decline at higher loss ratios?

(Teng/Perkins)

A
  • overall loss ratio, not specific types of claims loss ratio
  • at higher overall loss ratios, more policyholders have reached their max prems, so even a small claim will result in no add’l prem
68
Q

at the first adjustment, how might actual experience differ from expected experience?

(Teng/Perkins)

A
  • actual reported losses may differ from projected reported losses at policy inception
  • relationship between reported losses and retro prem may differ from what was projected at policy inception (eg: formula gives 72% LR, actual LR is 70%)
69
Q

what two assumptions underlie the PDLD method?

Teng/Perkins

A

1- prem responsiveness during subsequent adjustments is ind’t of the prem responsiveness during preceding adjustments
2- slope of line segment depends on the time period, not on the beginning loss ratio or beginning retro prem ratio

70
Q

what does assumption #1 of the PDLD method mean for the plot? [prem responsiveness in separate periods is ind’t]

(Teng/Perkins)

A

-even if slope of first line segment is different from what is expected, we do NOT change our expectations for the slope of the second line

71
Q

what does assumption #2 of the PDLD method mean for the plot? [slope of line segment depends on time, not LR or prem ratio]

(Teng/Perkins)

A
  • relates to when we change from one line to another

- we move from one line segment to the next at the retro adj., regardless of where the loss ratio ended up

72
Q

how do the two assumptions of the PDLD method fix the issues in Fitzgibbon’s method?

(Teng/Perkins)

A
  • Fitzgibbon relates ult. LR to ult. retro prem ratio - if actual experience differs from expected, there’s no way to get back on track
  • PDLD ratio related reported loss ratio to retro prem, ratio - if actual experience deviates from expected, next line segment begins at a starting point that corresponds to actual experience
73
Q

how does the PDLD method calculate the premium asset?

Teng/Perkins

A
  • project future loss dev. in each adj. period
  • estimate future prem by the product of future loss dev. in each period and the slope of the line segment in that period
  • sum these products to get premium asset
74
Q

what is an implication of the Teng/Perkins plot’s first line segment passing through the origin?

(Teng/Perkins)

A
  • combine two separate items into slope of first line segment:
  • -basic prem ratio
  • -true slope of first line segment (PDLD_1)
  • –> cannot tell how much each item contributes to total slope of first line segment, confusing interpretations
75
Q

how does the failure to distinguish the basic premium ratio from the first PDLD ratio in the first line segment of the Teng/Perkins plot make it harder to analyze changes over time?

(Teng/Perkins)

A

ex: if slope of first line segment has risen steadily over time, due to change in basic prem ratio, change in prem. responsiveness, or lengthening of loss reporting pattern?

76
Q

how does Feldblum suggest we adjust the first line segment of the Teng/Perkins plot?

(Teng/Perkins)

A

-subtract the average basic prem. charge (as a ratio to standard LR) from the first CPDLD ratio

77
Q

how does Feldblum’s adjustment to the Teng/Perkins plot change the plot?

(Teng/Perkins)

A
  • plot has positive y-int.

- slope of first line would be flatter

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