W&M Ch 16

Question 1

Retroactive date

Answer 1

• Restricts policy coverage to accidents occurring on or after that date
• Previous occurrence basis policy
• First year of professional practice

Question 2

Tail coverage

Answer 2

Provides protection for claims reported after professional retires

Question 3

Report year lag

Answer 3

=Report year - Accident year

Question 4

Mature C-M

Answer 4

Policy covers claims reported during the policy period, regardless of accident date

Question 5

First-year C-M

Answer 5

Policy covers only the “lag 0” column

Question 6

C-M Ratemaking Principles

Answer 6

1. C-M policy should always costs less than an occurrence policy, as long as claim costs are increasing
2. Whenever there is a sudden, unpredictable change in the underlying trend, C-M policies priced on the basis of the prior trend will be closer to the correct price than occurrence polices priced in the same way
3. Whenever there is a sudden unexpected shift in the reporting pattern, the cost of mature C-M coverage will be affected very little if at all relative to occurrence coverage
4. C-M policies incur no liability for IBNR claims so the risk of reserve inadequacy is greatly reduced
5. Investment income earned from C-M policies is substantially less than under occurrence policies

Question 7

Step factor

Answer 7

1. Recognize growth in exposure for each successive C-M policy during transition
   - Percentage of mature C-M rate
2. Determination requires evaluation of expected reporting lag and various factors affecting claim costs during the lag time
   - Leads to distribution of costs to each of the lags of mature C-M policy