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35 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Which of the following professionals performs ratemaking? a. Underwriter b. Actuary c. Claims Adjuster d. Broker |
b. Actuary Rationale: Actuaries perform ratemaking. The process involves statistical analysis, estimating, and reviewing previously analyzed information to estimate the cost of claims. |
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What are the two basic approaches to ratemaking? a. Estimating and statistical analysis b. Trend watching and estimating c. Class rating and schedule rating d. The law of large numbers and statistical analysis |
c. Class rating and schedule rating Rationale: Rating is the process by which underwriters apply the information developed by actuaries to the gathered risk information to establish a premium for specific risks. The two basic approaches are class rating and schedule rating. |
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What type of rating is used when the body of statistical data is too fragmented to permit class rating? a. Schedule rating b. Class rating c. Estimating d. Statistical analysis |
a. Schedule rating Rationale: Schedule rating is used when the body of statistical data is too fragmented to permit class rating |
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What type of rating is used when statistics can be gathered on a large number of risks that share common characteristics?
a. Schedule rating b. Estimating c. Statistical analysis d. Class rating |
d. Class rating
Rationale: Class rating is used when statistics can be gathered on a large number of risks that share common characteristics. |
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What affects ratemaking?
a. Business environment b. Environmental changes c. Consumer pressure d. Fraud |
a. Business environment
Rationale: Ratemaking is affected by the business environment. Insurers may not charge premiums that are commensurate with the risks they insure because of competition in the marketplace and government pressure. |
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Which body approves insurance automobile premiums in the provinces and territories?
a. Municipal government b. Federal government c. Provincial or territorial government d. Better Business Bureau |
c. Provincial or territorial government
Rationale: Most provinces and territories require insurers to submit automobile premiums to a provincial or territorial government body for approval. In some cases, procedures allow new rating programs to be used as soon as they are filed subject to certain caveats. In some jurisdictions, prior approval is required before any increase in rates is permitted. |
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What practices does regulatory action aim to remove?
a. Non-payment of premiums b. Discriminatory practices c. Denial of claim d. Improper coding |
b. Discriminatory practices
Rationale: Regulatory action aims to remove discriminatory practices by prohibiting insurers from refusing to insure a person, cancelling, or refusing to renew car insurance policies based on grounds such as a person's age, the age of a vehicle, or a missed payment. |
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What led to consumer discontent regarding automobile insurance?
a. Lack of choice in insurers b. Discriminatory practices c. Economic environment d. Rising automobile insurance costs |
d. Rising automobile insurance costs
Rationale: As consumer discontent with rising automobile insurance costs grew stronger, questions arose about the accuracy, objectivity, and fairness of the ratemaking process. Insurers’ efforts to explain and defend rating criteria and the ratemaking process were largely ineffective. |
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Why does ratemaking involve prospective analysis?
a. It produces figures that will be applied to claims in the future. b. It helps the organization plan for its investments. c. It helps the organization figure out how many key employees are needed to replace retirees. d. It helps the insurer figure out which consultants will be needed to plan for reorganizing the operation. |
a. It produces figures that will be applied to claims in the future.
Rationale: Ratemaking involves prospective analysis because it produces figures that will be applied to claims in the future. When premiums are increased, it is to pay for anticipated increases in the future cost of claims on policies written today |
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What is the ultimate determinant of the price paid by the consumer for insurance? a. How much money an insurer spends on marketing its product b. Competition in the marketplace c. The number of disasters in a given year d. Demographic changes in key markets |
b. Competition in the marketplace
Rationale: While actuaries and underwriters go to great lengths to produce rating programs, the ultimate determinant of the price paid by the consumer is competition in the marketplace. Price is the major factorfor consumers when they are shopping for insurance. |
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Outline reasons why statistical analysis of a risk might not yield useful conclusions for an underwriter. |
Statistical analysis of a risk might not yield useful conclusions • Insufficient statistical data • Underwriter’s familiarity with the industry • Sufficient data but difficult to compare risks • Statistical improbability of loss that does not rule its possibility • Underwriter should not dismiss a major claim just because it is large, happened once, and is likely to happen again • Underwriter looks beyond the loss record |
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State the major components of rates. |
Major components of rates • Anticipated cost of settling claims • Acquisition costs of the business - Commissions - Marketing - Operations • Costs of administering the process • Target profit |
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Outline the effects that catastrophes have on ratemaking. |
Effect of catastrophes • Some court decisions in the US have ignored policy contractual conditions to provide relief for unfortunate consumers who have been devastated by catastrophe • Example of Hurricane Katrina—a judge’s decision against an insurer effectively found a homeowners policy exclusion for flooding inoperative • Such decisions result when the government applies pressure to try to provide as broadly as possible for everyone who suffers when a catastrophe occurs • So, insurers must consider such judicial interpretations when pricing is set • Contract terms should be clearly outlined to demonstrate how policy reacts under given circumstances (otherwise insurer failures are certain to occur because of inadequate pricing) |
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Darnell is an experienced underwriter who has been writing accounts for more than 20 years. He has been asked to provide a quote on a hotel chain that operates throughout Canada. It is a fairly large and complex commercial risk. The broker he is dealing with is fairly new to insurance. Darnell establishes the base rate and arranges a meeting with the broker to cultivate a relationship and obtain the information required to properly assess the risk. Explain the practice of rating a risk. |
Rating a risk: • Practice of rating brings the underwriter’s quantitative and qualitative skills together • After producing a rate using quantitative skills, underwriters must make assessments and judge whether a risk qualifies for a reduction or a surcharge of the established rate • The underwriter loads the rate or makes deductions when credits are to be applied • The underwriter must also be concerned about the larger environment in which the risk operates • On larger, more complex risks, underwriters may manually calculate a rate to check the premium for credibility • Underwriters determine the insurance cost, which includes - projected losses - the insurer’s overhead - a profit loading for every unit of the exposure base chosen |
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Darnell is an experienced underwriter who has been writing accounts for more than 20 years. He has been asked to provide a quote on a hotel chain that operates throughout Canada. It is a fairly large and complex commercial risk. The broker he is dealing with is fairly new to insurance. Darnell establishes the base rate and arranges a meeting with the broker to cultivate a relationship and obtain the information required to properly assess the risk. Outline what Darnell, as the underwriter, will discuss with the broker at the meeting in order to refine the rate. |
Discussion with the broker • Darnell will explain his experience to the broker • Because he is experienced, he will spot anything odd about the risk • Even though there are enough hotel risks to make loss figures statistically reliable, heknows there could be credibility issues measuring loss experience of one entity against a similar entity • He knows the hotel chain operates in many areas and thus the risks are different, such as rural areas versus urban areas • As the underwriter, Darnell is prepared to use his judgement rather than rely on numbers alone |
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Darnell is an experienced underwriter who has been writing accounts for more than 20 years. He has been asked to provide a quote on a hotel chain that operates throughout Canada. It is a fairly large and complex commercial risk. The broker he is dealing with is fairly new to insurance. Darnell establishes the base rate and arranges a meeting with the broker to cultivate a relationship and obtain the information required to properly assess the risk. Describe how an underwriter must assess loss records. Use examples to explain the process. |
Assessing loss records • The underwriter will look at losses and consider whether or not the losses are a result of a natural disaster (weather events are possible but not necessarily probable) • Underwriters examine any major claims • Just because it is large and unlikely to happen again, it must be asked why it happened - Is it not likely to happen again or is the risk deteriorating? • The underwriter is alert to other conditions beyond claims under the policy - Perhaps there was a reduction of a deductible - Or a claim denial - Or the insured chose not to use insurance for small losses to improve claims record • It wasn’t that there weren’t any incidents, merely that they were not reported |
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What are the major companents of any rate?
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Insurance prices cost based on unknown (what if) componets: - antiicipated cost of settling claims - Acquistion costs of business such as commission, marketing, and other costs relating to the operation - costs of administering the process.
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What are the difference between ratemaking and rating?
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Ratemaking: accomplished by the actuaries - developing information that can be used by underwriter to establish premium - uses past data to calcuated present premium to pay for the future loss and increase of premium is to consider an increase of future cost of claim and current written policy - not for recovering premium deficicent from previous written years.
Rating: accomplished by the underwriter - uses the information developed by the actuaries on the gathered risk information to establish a premium for specific risks. - has two basic approach * class rating; use when statistics can be gathered on a large number of risk that share common characteristics * Schedule rating; uses when body of statissical data is too fragemented to permit class rating. i. practice rating bring the underwriter's quantitiative and qualitative skills together - producing a rate using the quantitiative skills, - then assess and judge whether the risk qualified for a reduction (deduction) or a surcharge (load) on the estiblished rate.
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What is retropspective rating? and where might you encounter it? |
Is to establish the reasonable cost of insurance by using losses incurred during the terms of that insruance and adding the insurance carries's expense and tax on premium. An exception to the forecasting method of ratemaking use on certain large commerical account - restrospective rating plan based on the insurerd's actual loss exerience during the policy term. - client and insurer agree on a formula under which the ultimate cost of claims will be borne by the insured - the agreement to minimum and maximium premium based on the premise that the insuer can recover the close of claims , expense and insurance charges.
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Explain the ratemaking process. |
ratemaking is accomplished by the actuaries: - developing information that can be used by underwriter to establish premium - uses past data to calcuated present premium to pay for the future loss and increase of premium is to consider an increase of future cost of claim and current written policy - not for recovering premium deficicent from previous written years.
Process involves: 1. analyzing stats on frequency and serverity of past claim 2. estimating the ulitmate cost of settling currently outstanding claims 3. using information that has been analyzed to estimate the cost of claims which will occur in the future (trending).
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What is CLASS rating and what is its advantages?
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A method used when statistics can be gathering a large number of risk that share common characteristics. ex. vehicle insurances and habitation insurance - record of lossess for a period under review can be subdivided into territory, type of unit, value of the unit insured and other relevation characteristic. - the large the pool of loss cost upon which statist informatin are drawn, the gereater the possibility that result will be more accurate. - require less judgements comparing to schedule rating which reduces production cost.
Advantage: - remove most of the judement that is needed to price a risk and streamline the poilcy issuing process resulting in the reduction of production costs.
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What is SCHEDULE rating? when is used?
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When a body of statistical data is too fragemented to permit class rating. - the number of risk charateristics is so large and varies that they do not support to the statistical plan. - premium rate are based on a schedule or a manual or a list multitude of characteristic which identified by an underwriter as important factors in measuring the degree of risk. - requires an underwriters to use their judgement
Used (process) is involving fixing a base rate (or key rate) and subject to debits and credit. - once a rate is selected, it will be subject to a loading for overhead and profit - rate for schedule-rated risk are modified from time to time based on statistical exhibits that are board enogutn in scope to produce a credible indication of future claims costs. |
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what is loading ? |
The additional overhead and profit to the rate selected. - larger or more comlex risk are manually calculated by an UW to check the premium for credibility on a rate. - UW determines the insurance cost that includes the projecting losses, the insurer's overhead and a profit loading for every unit of the exposure base chosen.
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Identify situations when statistical analysis of a risk for underwriting purposes would be less useful. |
1. insufficient statistical data - the scope of statistics gathered is not borad enough - target a characteristic that has not been rated
2. Familiarity with the industry - individual has years from underwriting or work in the that industry - able to recognize the most odd thing about a risk in an industry
3. Sufficient data but difficulty in comparing risk (same same but different) - with enough information on a risk but difficulty to measure the loss experience of the one entity due to certain characteristics .
4. statistical improvability of loss that does not rule its possibility - loss due to natural catastrophe are an example at hand is alway a possibility of an occurence, does not equate to the probability. - cannot dismiss large losses becasue a rish can still be declined depending on why it happened.
5. UW looks beyond loss record. - UW should be alert to other conitions beyon the claims reported. - perhaps there was a claims denial or reduction of a deductible - claims that are not reported to improve the claims record.
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Practice of Rating |
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What affect ratemaking? |
Business environment - effects of competition in the market place - effects of government pressure. |
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how does competition in the market place affect rating? |
Ultimately it comes down to prices that consumer pay - insurer would either discount their rate to gain new business and retenting existing customer from the competitor. |
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How does government pressure affect ratemaking? |
Government of most provinces and territories intervene actively, especially with automobile insurance. - control premium levels and rating criteria through rating boards. - BC, SK MB and Quebec are government regulated auto insurance providers.
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Described the regualtor orgins of auto insurance. |
Compulsory auto insurance was introduced to ensure that drivers could be held finanically responsible for claims caused b their negligence. - government allowed rating critera and prices to be determined by underwrtiting experience, actuarial calculation and marketplace force which result in avoidance with excessive premium rate. - complaints began when the premium started to increase due to the expense of automobile and litigation as traffic density increase. - polication pressure exerted on insurer to make auto insurance more afforable to yound river as their premium levels were comparatively higher due to high accident frequency and claim serveity - 1979s the provvinces introduce explicit pricing regualtion. |
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what two regulatory overivew system exist over rate filing? |
New rating program can be implemented as soon as they are filed but the insurer still need an approval from the regulatory body. - insurer must provide adequate documenation to support rate increase - governments are permitted to withdraw approval if the rates do no meet with regualtory criteria and in some cases, fines might be asessed against the insured. Insurers must have prior approval of rating increase. - must submit proposed changes and rating to the regulator in advance of their implementation - in many case the law states that rates are deemed to be approved if no objection is registerd with a given period of time. - some regulation require a public meetings from when rate changes fail to meetcertain criteria. Efforts of reforms: - loss in both cost and production time - underwritng training is required - computer systems need to be upgraded - new rating software must be developed - modification for data capturing and reporting are rquired. - new policy forms or other documentation are required for any changes in benefits or coverages. |
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Is rating ever completely fair to everyone? Explain |
Risk is a spreading mechansim that breaks down when cost-based rating is not the basis used to set premium - fiddling with the cost-based rating process reduces creates its own form of discrimination and result in inequities which cannot be justified. - policy holder placed in the open market end up subsidizing and inadequately rated risk becasue the loss suffered and pooled residual market business is factored in to the rate levels of all policyholder who are not in the pool.
*cost-based pricing (principle that the premium should be commensurated with the degree of risk ) |
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List examples of how a refrom affects the cost savings fro an insurer |
Affect the insurer in both cost and loss of production time as it does take time to adapt where the insurer will not produce the require savings in the early stages: - underwrting traning is required - computer systems need to be upgraded - new rating software must be developed - modification for data capturing and reporting are requried - training for brokers and agents must reporting are required - traning for broekrs and agents must be completed - new policy forms orother documentation must be wirtten for any changes in benefits or coverage |
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How do rforms affect actuarial projectons? |
Will be suspected until sufficient loss experience has accumulated in the new legislated environment. - difficult in projecting the ultimate loss ratio if reform affect how the caims reserve or settlement Actuarial projection - favourable will lead to expansion of business - unfavourable will limit the amount of new business written. |
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How could an insurer reduce the impact of reform? |
Soften the effect by: - reduce its the business and stop accepting new business - reduce number of polices in force and its premium volume - file new underwriting rules to modify the eligibilityt criteria and wait to see if approve or not - inforce policies may not b renewed if risk no longer fit within the insurer's original eligiblity criteria due to the not approved filing from the regulatory. ( not all filing from insurers gets approve if the regulator has determined a market dislocation is going to happen anyway.) Mark Disocation is the result in an influx of business to the provincial residual marekt pool assication. - each incident of price suppression will lead to inadequate pricing bring a drying up of the insurance market. |
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How can human rights legislate interfere with rating cirteria? |
Human rights consumer groups have made allegation that some automobile rating critera were either discriminatory or were not soically acceptable. - age - gender - marital status - postal code
Such proposal contrary to the principle that premium should be sommensurate with the degree of risk and insureraccepts. - UW can accept any risk based on their necessary expertise and be relatively confidence that the premium are calculated will be sufficient to pay claims they produce.
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Why should you not tiner with the cost-based rating process? |
If group A is paying to little premium, then group B is being forect to subsidize. - will creat a from of discrimination and result in inequities that cannot be justifed. |
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