Cas Exam 5 - Rating

Front 1

Minimum and maximum premium for a retrospectively rated policy

Back 1

Min = min Retro Premium Ratio * standard premium

Max = max Retro Premium Ratio * standard premium

Hint 1

Does it use the standard premium or the basic premium?

Front 2

Formula for retrospectively rated policy

Back 2

Retro Premium = (Basic Premium + losses * LCD) * tax multiplier

Subject to min and max premium

Hint 2

Does it use the basic premium or the standard premium?

Front 3

Three relevant criteria for an exposure base.

Back 3

1. Proportion (to claims)

2. Verifiable and objective (not easily manipulated)

3. Historical precedence

Front 4

When selecting a premium trend, what impact does a historical deductible change have?

Back 4

The number of quarters used in the premium trend should be after the date of the deductible change.

Hint 4

How many quarters of data should you use to determine the premium trend?

Front 5

Is auto physical damage short tailed or long tailed?

Back 5

Short tailed.

Front 6

Is homeowners short tailed or long tailed?

Back 6

Short tailed, unless talking about liability.

Front 7

If 2014 ultimate claims-made losses are $1,000 and loss costs increase by 5% each report year, what are 2015 claims-made losses?

Back 7

$1,050

Hint 7

There's no trick to it.

S2015q7

Front 8

Which of the four expenses is/are divided by earned premium?

Back 8

General expenses

Hint 8

There's only one.

Front 9

Which of the four expenses is/are divided by written premium?

Back 9

Other acquisition

Commission

Taxes, licenses, and fees

Hint 9

There are three of them.

Front 10

Formula for the trended present rates when calculating the credibility complement for the indicated rate change.

Back 10

(indicated / implemented)*(loss trend / prem trend)^(current eff. date - prior indicated eff. date)

Hint 10

What's left over from the prior indicated and implemented changes and how does it trend?

Front 11

Three purposes of risk classification

Back 11

1. Enhance fairness - price matches risk

2. Financial stability - prevent adverse selection

3. Economic incentives - widespread availability of coverage

Hint 11

Customer, company, industry

S2015q12

Front 12

Two issues with historical data with deductibles and limits when pricing and two solutions.

Back 12

1. Losses below deductibles may not be available. - Fit severity distribution

2. Losses above limits may be censored. - Use GLM or industry data.

Hint 12

What to do about missing data?

S2015q14

Front 13

Formula for OLF

Back 13

OLF = CRL / ARL

Hint 13

You don't need a hint

Front 14

How do you calculate on level losses when there are changes that increase/decrease losses?

Back 14

Calculate OLF = CRL / ARL

Hint 14

Same as on level premium

Front 15

How many minutes do you have per point?

Back 15

About 4 minutes per point

Front 16

Evaluate a variable as a good exposure base using 3 cirteria

Back 16

1. Proportional to losses - the higher x the higher losses and example

2. Practical - cost, how to verify, manipulate, objective

3. Historical - rate swings, cost, data

Hint 16

Criteria and state why

Front 17

Briefly discuss three considerations for a rating variable from ASOP 12

Back 17

1. Relationship to losses - correlated, causal, statically significant

2. Objective - well defined, measurable

3. Verifiable - manipulate

4. Legal - confirm before implementing

5. Privacy - invasion of privacy, accepted by public

Hint 17

There are lots of considerations in ASOP 12

Front 18

Briefly describe a situation where a negative profit is appropriate.

Back 18

1. To be competitive and grow business.

2. When investment income from long tailed lines will offset a negative profit.

3. When required by regulations.

Front 19

Discuss 2 situations where Pure Premium method is better than loss ratio method for calculating indicated rate change.

Back 19

1. New business where there is no existing rate.

2. New rating variables that are not available historically since on-level premium can't be calculated.

Hint 19

2 new things could be happening

Front 20

Does the fixed expense ratio apply to the premium or the pure premium?

Back 20

Premium

Front 21

What is the complement of the LER?

Back 21

The "Excess Ratio"

(2015spring9)

Front 22

What is the premium for a large deductible policy using ground up losses?

Back 22

Prem = (expected losses + F) / (1-v-q)

(2016s9)

Hint 22

Normal indicated rate change formula.

Front 23

What are the expected losses for a large deductible policy using "LER"?

Back 23

Exp Losses = ground up losses * excess loss ratio

Excess loss ratio = 1 - LER

(2016s9)

Hint 23

Uses ground up losses and complement of LER

Front 24

What are the "excess losses" and the "losses below the deductible" for a large deductible policy?

Back 24

Excess = ground up * excess ratio

Below ded = ground up * LER

(2016s9)

Hint 24

Uses ground up and LER

Front 25

What are the expected deductible payments for a large deductible policy?

Back 25

Exp ded = ground up * LER

(2016s9)

Hint 25

Uses ground up losses and LER

Front 26

Briefly discuss two benefits of multivariate classification ratemaking.

Back 26

1. To account for correlations between variables.

2. Provides the ability to investigate interactions between variables.

(2016s10)

Hint 26

Are the variables independent?

Front 27

What two changes make up the indicated rate change for each variable level to achieve a revenue-neutral overall change?

Back 27

Change 1 = current to rebased indicated

Change 2 = premium weighted offset of indicated relativity changes

(2016s10)

Hint 27

Change 1 =

Change 2 =

Front 28

Calculate the increased limit factor for $H assuming a basic limit of $B.

Back 28

ILF(H) = LAS(H) / LAS(B)

LAS(H) = LAS(B-H) * Pr(x>B) + LAS(B)

(2016s11) check this one, B-H?

Hint 28

ILF = ?

LAS(H) = ?

Front 29

Assume a ground-up annual severity trend applies of 10%. Briefly discuss how the ILF estimate would change for future accident years.

Back 29

The excess loss trend will be higher than the ground up loss trend (and higher than the basic limits loss trend). The ILF estimate would be higher.

(2016s11)

Hint 29

Basic limits < ground up loss < excess

Front 30

Increased Limits Factor Credibility description

Back 30

ILFs are used to adjust losses capped at the attachment point to produce an estimate of losses in the specific excess layer.

(2016s11)

Hint 30

Just a verbal description.

Front 31

Increased Limits Factor Credibility description

Back 31

ILFs are used to adjust losses capped at the attachment point to produce an estimate of losses in the specific excess layer.

(2016s11)

Hint 31

Just a verbal description.

Front 32

Formula for the complement of credibility for the excess late between $250,000 and $500,000 and a base limit of $100,00 using ILFs.

Back 32

C = L_100 * [ILF(500) - ILF(250)] / ILF(100)

C = La * ( ILF_a,l - ILF_a) / ILF_a

Or

C = Ld * (ILF_a,l - ILF_a) / ILF_d

(2016s11)

Hint 32

C = La * ...

Or

C = Ld * ...

Front 33

Formula for the complement of credibility for the excess late between $250,000 and $500,000 and a base limit of $100,00 using ILFs.

Back 33

C = La * ( ILF_a,l - ILF_a) / ILF_a

Or

C = Ld * (ILF_a,l - ILF_a) / ILF_d

(2016s11)

Hint 33

C = La * ...

Or

C = Ld * ...

Front 34

Formula for the complement of credibility for the excess layer between $250,000 and $500,000 and a base limit of $100,000 using ILFs.

Back 34

C = La * ( ILF_a,l - ILF_a) / ILF_a

Or

C = Ld * (ILF_a,l - ILF_a) / ILF_d

***La = Losses capped at "a". Not an average!!!

(2016s11)

Hint 34

C = La * ...

Or

C = Ld * ...

Front 35

Briefly describe two non-pricing solutions that can address inadequate rates.

Back 35

1. Lower expenses

2. Underwriting guidelines can be strengthened to limit exposure to worse performing segments

3. Reductions in coverage, higher deductibles without changing rates.

4. Require loss mitigating practices.

5. More aggressive investment strategy

(2016s12)

Hint 35

Remember to be specific (by including an explanation).

Front 36

What is the offset factor and the total change by territory if you have the current and indicated territory factors?

Back 36

Offset = wtd avg curr / wtd avg ind

Weight based on exposure

Total change = ind / curr * offset

2016s13

Hint 36

Weighted based on exposure

Front 37

Briefly discuss the appropriateness of using calendar year aggregation in estimating unpaid claims.

Back 37

Calendar year is fixed at the end of the year.

It does not account for future development.

There is no estimation of IBNR.

CY is not appropriate.

2016s15

Hint 37

Development

Front 38

Briefly discuss the appropriateness of using accident year aggregation in estimating unpaid claims.

Back 38

Accident year claims still develop after the end of the year.

It is a better match of premium to losses than CY is.

Accident year is appropriate.

2016s15

Hint 38

Development

Front 39

Calculate 2014 written car years if 105 six-month policies are written on 10/1/2014.

Back 39

105/2 = 52.5

All are written, but the are only 6-month policies.

Hint 39

Car Years.

Front 40

Four considerations for the appropriateness of a new risk characteristic according to ASOP 12

Back 40

1. Objective

2. Verifiable

3. Legal

4. Causal

5. Credibility

6. Industry practices

7. Practical

Hint 40

3 are typical, the 4th has to do with modeling

Front 41

Two reasons why GLM analysis is typically performed on loss cost data instead of loss ratios.

Back 41

1. No need to get on level premium

2. No standard probability distribution for loss ratios.

2016s12

Hint 41

Distributions

Front 42

An insured purchases a $400,000 policy on a property values at $500,000. Coinsurance requirement is 90%. Calculate coinsurance penalty for a $300,000 loss.

Back 42

Required amount = 0.90*500,000=450,000

app ratio = 400,000/450,000=.889

Penalty = 300,000*(1-.889)=33,333

2016f14

Hint 42

1. Required amount

2. apportionment ratio

3. Penalty

Front 43

An insured purchases a $400,000 policy on a property valued at $500,000. Coinsurance requirement is 90%. Calculate the maximum coinsurance penalty.

Back 43

Max penalty is when loss is at face value of policy ($400,000).

Required = 500,000(0.90)=450,000

App ratio = 400,000/450,000=0.889

Penalty = 400,000(1-0.889)=44,444

2016f14

Hint 43

1. Req

2. App ratio

3. Penalty

Front 44

Briefly describe two issues associated with underinsured properties.

Back 44

1. Policyholder​ will not be fully insured for a loss

2. Premium will not be equitable for underinsured vs. fully insured policies.

3. Regulator might force an insurer to pay above policy limit for underinsured policies in the event of a catastrophe.

4. Expected losses are higher for underinsured policies when partial losses are possible.

2016f14

Hint 44

Coverage for policyholder

Expected losses and equity b/w policies

Front 45

Premium formula for workers compensation under an experience rating plan.

Back 45

Prem=(std prem)*(M)

M=(Ap*Cp+Ep*(1-Cp)+Ae*Ce+Ee*(1-Ce)) / Expected losses

Expected losses=payroll*expected loss rate

Ep=Expected Losses * (D-ratio)

Ee=Expected Losses * (1 - D-ratio)

2016f15

Hint 45

Actual primary

Actual excess

Expected primary

Expected excess

D-ratio

Experience modification factor, M

Front 46

Benefits and deficiencies of estimating reserves using either all other internal lines combined or using industry data separately by line.

Back 46

Internal

Benefit-credible if similar development

Deficiency-different settlement rates or changes to mix of business will distort estimates

External

Benefit-adding homogeneous lines adds credibility

Deficiency-claim settlement rates for industry might be different

2016f17

Hint 46

Credibility and homogeneity

Front 47

Total losses for large deductible policy

Back 47

Total losses = expected excess loss + ALAE + risk margin + processing + credit risk

Hint 47

Sum up losses and ALAE plus 3 other extra costs

Front 48

Calculate the complement of credibility for the excess layer between $250,000 and $500,000 using ILFs.

Back 48

C = L_250 * [ILF(500) - ILF(250)] / ILF (250)

C = La ((ILF_a+l - ILF_a) / ILF_a )

La = losses capped at a

a is the lower bound of the layer

a+l is the upper bound of the layer

Hint 48

C = La * (...

Front 49

Py 2016 EP = 100,000

Rate change +12% on 7/1/2016

What is the average rate level when calculating py 2016 EP at current rate level?

Back 49

1.00(1/2) + 1.12(1/2) = 1.06

Hint 49

Calendar year uses a normal box with diagonal rate changes.

Policy year uses a diagonal box with diagonal rate changes.

Front 50

Adjustments to premium before calculating indicated rate change.

Back 50

On level

Trended

Front 51

Briefly describe two scenarios in which policy year premium is not fixed at the completion of the policy year.

Back 51

1. When there is a premium audit after the end of the policy year.

2. Retrospective rating policies have premium adjustments years after a competed policy year due to loss development.

Hint 51

1. Audit

2. Retrospective rating policy

Front 52

Harwayne's method

Back 52

1. PP adjusted for base states exposures

2. Adjusted class = PP * offset

3. Average non base States

4. Credibility weight with base state

Hint 52

Credibility that adjusts for distributional differences.

Front 53

If the policy fee is an additive fee added to each exposure in the last step of the rate calculation, then what is the formula for the indicated policy fee?

Back 53

(fixed expenses per exposure) / (1-v-q)

Hint 53

(___ expenses per ____) / (?-?-?)

Front 54

All the same:

Prem = L + LAE + Fixed + variable + profit

1 = (LR + LAE Ratio)/(1-v-q)

Back 54

Just remember this

Hint 54

Just remember this

Front 55

Formula for indicated policy fee

Back 55

Police Fee denoted as A_p

A_p = E_f / (1-v-q)

(q, or Q_t, is the target profit)

(1-v-q is the variable permissible LR)

Hint 55

Related to Fixed expenses, but adjusted.

Front 56

Briefly discuss a problem associated with underinsurance from the following perspectives:

1. Insured

2. Insurer

Back 56

1. Insured will not be fully covered for a total loss and will pay coinsurance penalties

2. If insurer assumes policies are insured to value, rates will be inadequate.

Hint 56

1. Total loss? Penalties?

2. Rate adequacy?

Front 57

Formula for indemnity payment

Back 57

Indemnity = loss * apportionment ratio

(Apportionment ratio = covered / full required)

Hint 57

Uses apportionment ratio

Front 58

Formula for the experience modification factor (and AER, and unrptd)

Back 58

Mod = z*(AER-EER)/EER ... or ...

Mod = z*(AER/EER)+(1-z)*1.00

AER = (loss + unrptd)/CSBL

unrptd = CSBL * EER * %unrptd

2017s12

Hint 58

AER = (loss + unrptd)/CSBL

Front 59

Describe a situation in which it would be appropriate for schedule rating to be used in addition to experience rating.

Back 59

There's a new safety program (or rating characteristic or loss control method) that isn't part of the experience rating method yet.

2017s12

Hint 59

Schedule rating is for individual risk characteristics that are expected to have a material impact on future loss experience but are not adequately reflected in the prior loss experience (or experience rating plan).

Front 60

Which has more reserve risk, an occurrence policy or a claims made policy?

Back 60

Occurrence. There's a lag between occurrence and when it is reported.

Hint 60

Reporting

2016f3

Front 61

Which has less reserve risk, an occurrence policy or a claims made policy?

Back 61

Claims-made. There's no IBNR, just development on known claims.

Hint 61

IBNR

2016f3

Front 62

How do 2 differences between occurrence policies and claims-made policies impact target underwriting profit?

Back 62

1. Occurrence has more investment income due to the lag and would lower the target UW profit.

2. Occurrence has more reserve risk due to reporting lag and would increase the target UW profit.

Hint 62

Investment income and reserve risk

2016f3

Front 63

When you calculate on-level premium, do you use written premium or earned premium?

Back 63

Earned Premium

Hint 63

2016f8

Front 64

Evaluate [blank] using three criteria of a good exposure base

Back 64

1. Proportional to expected loss

2. Practical

3. Historical precedence

Front 65

Briefly discuss adding [blank] as a rating variable using 3 considerations from ASOP 12

Back 65

1. It should relate to expected losses. [Blank] is ...

2. Objective. [Blank] ... well defined ... objective...

3. Affordability. [Blank] ... affordable for ...

Front 66

What is the retroactive date for a claims made policy?

Back 66

Losses occurring before the retroactive date are exclude from a claims made policy.