W&M Ch 1-3 Flashcards
Define “Exposure (X)”
Basic Unit of risk underlying the premium
Product Pricing Fundamental Equation
Price = Cost + Profit
What are the Premium Measurement methods
- Written Premium - from policies issued during time period
- Earned Premium - from coverage provided during time period
- Unearned Premium - portion of written for which coverage has not been provided
- In-force Premium - full-term premium for policies that are in effect at certain point in time
Define “Premium (P)”
Amount insured pays for insurance policy
Define “Claimant”
Individual(s) making the demand for indemnification (claim) by alleging injuries or damages covered by the policy
Define “Claim”
Insured request to insurer for indemnification for financial loss from an event covered by the policy
Define “Report Date”
When claimant reports claim to insurer
Define “Date of Loss”
aka accident date or occurrence date - date of event causing the loss
Define “Loss”
Amount payable to claimant under the terms of the insurance poicy
Define “IBNR (Incurred but not reported)”
Claims that have occurred, but not currently known by insurer
Define “Case Reserve”
Estimate of unpaid losses for known claims
Define “Paid Losses”
Amounts that have been paid to claimants
Define “Ultimate Losses”
Amount required to settle all claims for a defined group of policies
-Differs from reported loss due to IBNR and case adequacy or (IBNER)
Ultimate Losses = Reported Losses + IBNR Reserve + IBNER Reserve
Define “Reported Loss (aka Case Incurred Loss)”
Sum of paid loss and ending case reserve
Reported Losses = Paid Losses + Case Reserve
Define “Unallocated Loss Adjustment Expense (ULAE)”
Claim related expenses that cannot be directly attributable to a specific claim
-e.g. claims department salaries and rent
Define “Allocated Loss Adjustment Expense (ALAE)”
Claim related expenses that can be directly attributable to a specific claim
-e.g. legal fees for outside counsel hired to work on a specific claim
In relation to underwriting expenses, what are “Other Acquisitions”?
Expenses other than commissions to acquire business
-e.g. advertising, mailings, salaries of employees who help write policies
What are some characteristics of Commissions and Brokerage?
- Paid to insurance agents or brokers for generating business
- Usually stated as percentage of written premium
- May vary between new and renewal business
- May be based on quality and/or volume of business written
What are “Taxes, Licenses, and Fees” in relation to underwriting expenses?
- Taxes and fees for writing business
- Does not include federal income taxes
What is a “General” expense in relation to underwriting expenses?
Remaining expenses associated with the operations
-e.g. rent, building maintenance, salaries of employees not included in other categories
What are the two main sources of profit?
- Underwriting profit (or operating income)
- generated from individual insurance policies - Investment income
- generated by investing funds held by company
Define “Underwriting profit”
Company assumes risk that premium charged is not enough to pay losses and expenses
- Must maintain capital to support this risk
- Entitles company to reasonable expected return on capital
Appropriate balance of the Fundamental Insurance Equation must consider the facts that:
- Ratemaking is prospective
- Should be achieved on overall and individual level
What is the Fundamental Insurance Equation?
Premium = Losses + LAE + UW Expense + UW Profit
Frequency
Used to:
- identify trends in claims occurrence or utlization
- measure effectiveness of u/w action
Frequency = Num of Claims / Num of Exposures
What are some examples of items for which experience may need adjustment?
- rate changes
- changes in mix of business
- operational changes
- law changes
- inflationary pressures
Pure Premium or loss cost (L)
Highlight trends in overall loss costs due to changes in both frequency and severity
Pure Premium = Total Losses / Num of Exposures
= Frequency x Severity
Severity
Provides information about:
- loss trends
- impact of changes in claims handling procedures
Severity = Total losses / Num of claims
Loss Ratio
Loss Ratio = Total Losses / Total Premium
= Pure Premium / Average Premium
Average Premium
Highlight changes in mix of business
Average Premium = Total Premium / Num of Exposures
Underwriting Expense Ratio
Monitor and compare actual to expected
-may also compare to other insurers as a benchmark
UW Exp Ratio = Total UW Expenses / Total Premium
Loss Adjustment Expense Ratio
Used to:
- monitor stability of costs associated with claim settlement procedures
- compare to other insurers to evaluate claims settlement procedures
LAE Ratio = Total LAE / Total Losses
Combined Ratio
Primary measure of profitability of a book of business
Combined Ratio = Loss Ratio + LAE / Earned Premium + UW Expenses / Written Premium
Operating Expense Ratio
Important when reviewing overall profitability
OER = UW Exp Ratio + LAE / Earned Premium
Close Ratio (aka hit ratio or conversion rate)
- Measures rate at which prospective insureds accept a quote for new business
- Useful for product management and marketing
Close Ratio = Num of Accepted Quotes / Num of Quotes
Retention Ratio
- Measures percentage of current insureds that renew their policies at expiration
- Useful for product management and marketing
- used to determine the competitiveness of rates
- closely monitored following rate changes and major changes in service
Retention Ratio = Num of Policies Renewed / Num of Potential Renewal Policies
Written manuals are used to do what?
- help agents understand the rating process
- file with insurance regulators
What is a rating manual used for?
Used to classify and calculate rate for a risk
What do rating manual rules contain?
- Contains qualitative information which helps user with rating algorithms
- Summary of available policy forms
- Premium determination considerations
- Classification of risk
What information is needed to calculate premium for a given risk?
- Rules
- Rate pages
- Rating algorithm
- Underwriting guidelines
What are Rating Algorithms and what type of items do they include?
Provides the detail instructions to calculate the policy premium
- Uses information in rules and rate pages
- Includes such items as:
- Order to consider rating variables
- How rating variables are applied (multiplicative, additive)
- Maximum and minimum premiums (or sometimes maximum discount or surcharge)
- Rounding instructions
What do Rate Pages contain?
Contains the numbers needed to calculate premium
-e.g. base rates, rating factors, fees
What is a Ratemaking Review?
- Analyze adequacy of existing rates
- generally use internal or industry historical data to project future costs
- company should collect and maintain relevant and consistent historical data - Pricing new products
What are the Underwriting Guidelines?
Company-specific criteria for acceptance or placement of a risk
- decisions to accept, decline, or refer risks
- company placement
- tier placement
- schedule rating credits/debits
What should you review internal data for?
- Appropriateness for the intended purpose of the analysis
2. Reasonableness and comprehensiveness of the data elements
What should you do when ratemaking data is limited?
- Must be aware of the impact on the analysis
- Should examine how sensitive the results are to various assumptions
- Select data that minimizes distortions in results
Accounting information needed for Ratemaking
- May not even be specific to one line of business
- Expenses that fall into this category
- underwriting expenses - incurred in acquisition and servicing of policies
- ULAE
Risk Data used for Ratemaking
- Need to link policy exposure and premium with corresponding claims and losses
- Use Policy database and Claims database
Aggregation by Calendar Year
- Transactional data
- Primary use
- -aggregation of exposures
- -may be used for LOBs or coverages in which losses are reported and settled quickly
What three objectives apply to Data Aggregation?
- Accurately match losses and premium for the policy
- Use the most recent data available
- Minimize data collection and retrieval costs
Main disadvantages of Calendar Year Data
Mismatch in timing between premium and losses
- earned premium comes from policies in force during the year
- losses may come from payments or reserve changes on policies from previous years
Advantages of Calendar Year Data
- No future development - the value remains fixed and doesn’t change over time
- Readily available - most financial reporting on a calendar year basis
Advantage of Accident Year Aggregation
Better match of premium and losses than calendar year
Aggregation by Accident Year
- Losses grouped according to date of occurrence, regardless of when policy written or claim reported
- -will develop over successive CYs with more information and as new claims are reported
- Most common grouping of claims data for the actuarial analysis of unpaid claims
Aggregation by Policy Year or Underwriting Year
- Group premiums and losses by year in which policy was written
- Losses arising from a PY can extend over a 24-month calendar period
Disadvantage of Accident Year Aggregation
Must estimate future development on claims
-May select valuation date several months after end of year to improve estimate because allows some time for loss emergence
Disadvantage of Policy Year Aggregation
Extended time frame - data takes longer to develop
Advantage of Policy Year Aggregation
True match between claims and exposures
Advantage of Report Year Aggregation
Number of claims is fixed at close of the year
Aggregation by Report Year
Group claims according to date of reoprt to the insurer
-Claims-made coverage is dependent on the report date
Sometimes the desired data for analysis is unavailable, how do you deal with this?
Must work with available data and use actuarial judgment to deal with data deficiencies
-e.g. if missing earned premium by territory, may use in force premium by territory to estimate
Overall vs. Classification Analysis
- Reviewing the adequacy of the overall rate level
- -data can be highly summarized
- Classification analysis
- -data must be at a more detailed level
External Data
- Statistical plans
- Other aggregated industry data
- Competitor rate filings/manuals
- Other third-party data
