W&M Ch 11

Question 1

Challenges to territorial ratemaking

Answer 1

1. Tends to be heavily correlated with other rating variables -e.g. high value homes often located together -makes traditional univariate analysis very susceptible to distortions 2. Often analyze territory as collection of small units -data in each individual territory is sparse

Question 2

Territorial ratemaking generally involves two phases

Answer 2

1. Establishing territorial boundaries 2. Determining rate relativities for the territories

Question 3

Two major issues calculating the Geographic Estimator with univariate techniques

Answer 3

1. Sparse data results in volatile experience 2. Location tends to be highly correlated with other non-geographic factors

Question 4

What are two Spatial smoothing techniques used to improve estimate of unit by using info from nearby units?

Answer 4

1. Distance-based approach -Give weight to nearby geographic units based on distance from primary unit -Assumption tends to be most appropriate for weather-related perils 2. Adjacency-based -Weight given to rings of adjacent units –immediately adjacent units get most weight -Tends to be most appropriate for perils driven by socio-demographic characteristics (e.g. theft)

Question 5

Basic Clustering Routines

Answer 5

-Quantile methods –Use equal number of observations -Similarity methods –Based on how close estimators are -Note - do not naturally produce contiguous groupings –Need to add contiguity constraint if that is desired

Question 6

Importance of ILFS growing for several reasons

Answer 6

1. Personal wealth continues to grow 2. Economic Inflation drives up costs 3. Social inflation

Question 7

Why would you choose to vary the profit provision by limit

Answer 7

1. Experience in higher limits can be volatile 2. Less frequent, less severe 3. Greater variability adds uncertainty so more risky and challenging to price 4. May alter profit provision to reflect higher cost of capital needed to support additional risk

Question 8

Give an example why frequency may vary by limit chosen

Answer 8

E.g. Personal Auto - person who chooses high limit tends to have lower frequency -may be due to fact that individual choosing higher limit may be more risk averse

Question 9

Additional Considerations performing ILF Ratemaking

Answer 9

1. Historical losses should be adjusted for expected trend 2. Depending on age of data, claims may not be settled -Ideally all claims should be developed to ultimate 3. Losses may be censored from below if policy has a deductible -Can add back deductible -May not be possible to know how many claims were completely eliminated due to deductible

Question 10

Fitted Data Approach

Answer 10

Fit curves to empirical data

• Smooth out random fluctuations
• Common distributions include lognormal, Pareto, and the truncated Pareto

Question 11

Multivariate Approach to ILFs

Answer 11

1. GLMs can deal more effectively with sparse data 2. Major difference between GLM and univairiate approaches using LASs -GLM does not assume frequency is same for all risks

Question 12

Two Basic Types of Deductibles

Answer 12

1. Flat dollar deductible specifies a dollar amount below which losses are not covered by policy 2. Percentage deductibles are stated as a percentage of coverage amount

Question 13

Some reasons deductibles are used

Answer 13

1. Premium reduction 2. Eliminates small nuisance claims 3. Provides incentive for loss control 4. Controls catastrophic exposure

Question 14

Other considerations to deductible ratemaking

Answer 14

1. Censored Data -Ground-up losses may not be known due to fact that losses below deductible are often not reported -Cannot use data for policies with higher deductibles to price lower deductibles 2. Trend and development -Should be trended and developed

Question 15

Fitted Data Approach to deductible pricing

Answer 15

LER Can be calculated given a continuous distribution of losses

Question 16

Practical Considerations to Deductible Pricing

Answer 16

1. Claim Behaviour -Method assumes insureds at different deductible levels have same claiming behaviour 2. Choice of Deductible -Lower-risk insureds tend to choose higher deductibles 3. Using univariate and multivariate classification techniques will reflect behavioural differences in data -Actuary may review these before selecting relativities 4. Size of premium credit -Depending on size of policy, the premium credit for selecting a deductible may exceed deductible

Question 17

Options to account for different expected expense and loss levels for larger insureds

Answer 17

1. Vary the expense component 2. Incorporate premium discounts 3. Include loss constants

Question 18

Three ways to adjust for large policies being overcharged for expenses

Answer 18

1. Calculate variable expense provision that only applies to first $5000 of standard premium 2. Expense constant 3. Premium discount

Question 19

Explain why loss experience is generally better on large risks than on small risks

Answer 19

1. Small companies have less sophisticated safety programs due to cost to implement and maintain 2. Small companies often lack programs to help injured workers return to work 3. Experience rating plan provides an incentive for safety procedures -Small insureds either unaffected or only slightly impacted by ERP, thus less incentive to control losses

Question 20

Coinsurance apportionment ratio

Answer 20

Ratio of insured amount to either (i) a stated sum, or (ii) a specified percentage of the value of the insured property -Max ratio is 1

Question 21

Coinsurance requirement

Answer 21

Least amount of insurance for which apportionment ratio =1

Question 22

Coinsurance defiency

Answer 22

Amount by which coinsurance requirement exceeds carried insurance

Question 23

Coinsurance penalty

Answer 23

Amount (greater than zero) by which an indemnity payment for a loss is reduced by operation of a coinsurance clause -Note: no coinsurance penalty exists if full policy face amount is paid, whether or not a coinsurance clause applies

Question 24

Insurance to value

Answer 24

Property is insured to the exact extent assumed in the premium rate calculation

Question 25

When will the maximum coinsurance penalty occur?

Answer 25

When L=F

Question 26

Formula to determine rate for a selected ITV

Answer 26

Question 27

The pure Premium Rate decreases as the policy face increases, describe the Rate of Premium Rate Change

Answer 27

-Small losses outnumber large ones, rates decrease at a decreasing rate -Losses of all sizes equally numerous, rates decrease at a constant rate -Large losses outnumber small ones, rates decrease at an increasing rate

Question 28

Insurance to Value Initiatives

Answer 28

-Guaranteed Replacement Cost (GRC) encourages insurance to full value -Sophisticated property estimation tools -Companies can generate additional premium without increasing rates -Industry has also made better use of –Property inspections –Indexation clauses –Education of insureds