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
