W&M Ch 15

Question 1

Considerations when pricing Commercial Insurance Products

Answer 1

1. Creation of homogeneous groups for ratemaking purposes not feasible 2. Some commercial risks are large enough to use their own experience (in whole or part) to price 3. Individual Risk Rating (IRR) -Price coverage provided more accurately than if rates were based in manual rates only -Balance risk sharing and risk bearing

Question 2

Manual rate modification mechanisms

Answer 2

-Experience rating -Schedule rating

Question 3

Rating techniques for large commercial insureds

Answer 3

-Large deductible plans -Loss-rated composite rating -Retrospective rating plans

Question 4

Actual and expected experience may be compared in following ways for experience period

Answer 4

-Actual paid loss & ALAE with expected paid loss & ALAE -Actual reported loss & ALAE with expected reported loss & ALAE -Projected ultimate loss & ALAE with expected ultimate loss & ALAE -Projected ultimate loss & ALAE adjusted to current exposure and dollar levels with expected loss & ALAE based upon current exposure and dollar levels

Question 5

Formula for computing GL ERP credit/debit

Answer 5

CD=( (AER - EER) / EER) x Z

Question 6

Calculation Subject B/L L&ALAE Costs

Answer 6

1. Company Subject B/L L&ALAE Costs 2. Calculate Reported Losses and ALAE Limited by Basic Limits and MSL 3. Add Expected Unreported Losses and ALAE Limited by Basic Limits and MSL 4. AER = (b. + c.) / (1)

Question 7

NCCI Formula with substitutions for primary and excess credibility

Answer 7

Question 8

Schedule Rating

Answer 8

1. Does not directly reflect claim experience 2. Recognizes characteristics expected to have material effect on experience that are not actually reflected in experience -Changes in exposure -Changes in risk control programs -Used when risk too small to qualify for experience or composite rating 3. May be used on objective criteria or subjective underwriting judgment

Question 9

Composite Rating

Answer 9

1. Large, complex risks use a single, composite, exposure base instead of several for many different coverages 2. Composite rate determined at the beginning of the policy period using historical exposures -May be determined using manual rates with experience and/or schedule mods -Depending on size, may be based solely on insured’s own experience (aka Loss Rated) 3. After expiration, audited to determine composite exposures.

Question 10

Pricing Considerations of Large Deductible Policies

Answer 10

-Claims handling –insurer may handle all claims, even if below deductible -Application of Deductible –may apply only to losses or losses & ALAE -Deductible Processing –insurer may pay cost of entire claim and then seek reimbursement from company for amounts below deductible

Question 11

Formula to calculate premium of Large Deductible Policy

Answer 11

• CR = Credit Risk
• RM = Risk Margin

Question 12

Basic Retrospective Rating Formula

Answer 12

Retro Rating = (Basic Premium + Covered Losses) x Tax Multiplier

Question 13

Basic Premium

Answer 13

Intended to provide for

• Insurer’s target underwriting profit and expenses excluding expenses provided for by LCF and tax multiplier
• Net charge for limiting the retro premium between minimum and maximum
• Cost of limiting each occurrence, if applicable

Question 14

Standard Premium

Answer 14

-Insurance premium for risk before consideration of retro plan and any premium discount -Determined on basis of exposure, insurer’s rates, experience mod, and any premium charges excluding premium discount

Question 15

Insurance Charge and Insurance Savings

Answer 15

-Insurance Charge is an estimate of cost to insurer associated with retro max -Insurance savings is an estimate of savings to insurer for requiring a min premium