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58 Cards in this Set
- Front
- Back
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Ratemaking Principles
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1) A rate provides for all costs associated with the transfer of risk 2) A rate is an estimate of the expected value of future costs 3) A rate provides for the costs associated with an individual risk transfer 4) A rate is reasonable and not excessive, inadequate or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer
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Ultimate losses equation
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reported losses + IBNR Reserve + IBNER Reserve
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The goal of ratemaking
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to assure the fundamental insurance equation is balanced. Ratemaking is prospective, and this involves estimating the components of the fundamental insurance equation to determine whether or not the estimated premium is likely to achieve the target profit during the period the rates are in effect. Balance should be attained at the aggregate level and the individual level
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Elements necessary to calculate the premium for a given risk
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rules, rate pages ,rating algorithm, underwriting guidelines
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Instructions for calculating a rate include
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the order in which rating variables should be applied, how rating variables are applied in calculating premium, max/min premium, how rounding takes place
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Examples of UW characteristics for Personal Auto, Homeowners, Workers’ Comp, Commercial General Liability, Medical Malpractice, Commercial Auto
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Personal Auto: Ins. Credit Score, Homeownership, Prior Bodily Injury Limits Homeowners: Ins. Credit Score, Prior Loss Information, Age of Home Workers’ Comp: Safety Programs, Number of Employees, Prior Loss Information Medical Malpractice: Patient Complaint History, Years since residency Commercial Auto: Driver tenure
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Internal data involved in ratemaking
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risk information: exposures, premiums, claim counts, losses, and claim or policy characteristics accounting information: UW expenses and ULAE
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Types of data aggregation: Calendar year
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captures premium/losses transactions during a 12 month calendar year adv: data is quickly available at CY end, used for financial reporting so there is no additional expense to aggregate the data disadv: mismatch in timing between premium and losses
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Types of data aggregation: Accident Year
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aggregation of premium/exposures follows the same precept as CY premium/exposures adv- provides a better match of premium and losses than CY aggregation, losses on accidents occurring during the year are compared to EP on policies during the same year disadv: since the AY is not closed at year end, future development on known losses needs to be estimated
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Types of data aggregation: Policy Year
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considers all premium and loss transactions on policies that were written during a 12 month period, regardless of when the claim occurred or was reported, reserved, or paid adv: best match between premium and losses disadv: data takes longer to develop than both CY and AY, since PY exposures for a product with an annual policy term are not fully earned until 24 months after the start of the PY
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Types of data aggregation: Report Year
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similar to CY-AY except losses are aggregated according to when the claim was reported. Used for commercial lines products using claims-made policies (med mal)
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Third party data not specific to insurance
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1) Economic data (Consumer Price Index) insurers may examine the CPI at the component level to find trends relevant to the insurance product being priced 2) geo-demographic data (avg characteristics of a particular area) i) population density can be a predictor of accident frequency ii) weather indices, theft indices, and average annual miles driven 3) credit data is used by insurers to evaluate the insurance loss experience of risks with different credit scores. Insurers feel credit is an important predictor of risk and began to vary rates accordingly
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Exposure
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the basic unit that measures a policy’s exposure to loss
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Characteristics of an exposure base
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1) proportional to expected loss 2) practical 3) historical precedence
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Adjustments to historical premium to produce projected future premium
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brought to current rate level, developed to ultimate, adjusted for actual or expected distributional changes
Items that can cause changes in the average premium – a rating characteristic (eg. Amount of insurance purchased will increase with inflation), moving all existing insureds to a higher deductible, acquiring the entire portfolio of another insurer writing higher policy limits |
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Items that affect the length of the trend period
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historical period with terms other than 12 months, historical prem is PY rather than CY, proposed rates expected to be in effect for more or less than 1 year
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One-Step Trending is not appropriate when
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changes in avg prem vary year by year, historical changes in avg prem are very different than changes expected in the future
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Other external influences impact future experience
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judicial environment, regulatory and legislative changes, guarantee funds, economic variables, residual market mechanisms
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Preliminary adjustments to losses prior to projecting losses to cost level expected
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removing individual shock losses and catastrophe losses from historical and replacing with long-term expectations provision, developing immature losses to ult, restating losses to benefit and cost levels expected during the future policy period
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Categories of UW expense
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commission and brokerage, other acquisition costs, taxes, licenses, and fees, general expenses
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U/W expense divided into
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fixed: assumed to be same for each risk, variable: vary directly with premium
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Distortions when all variable expense method is used
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understates prem need for risks with relatively small policy prem, overstates prem need for risks with relatively large policy prem
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Methods to fix incorrect premium
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premium discount, expense constant
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Premium based projection
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recognizes differences between fixed and variable and calculates each separately
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Distortions when using premium based projection
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recent rate increases (or decreases) implemented during or after the historical period will tend to overstate (or understate) the expected fixed expenses, distributional shifts that have increased the average premium or decrease the average premium will tend to overstate or understate the estimated fixed expense ratios, countrywide expense ratios that applied to state projected premium to determine the expected fixed expenses can create inequitable rates for regional or nationwide carriers
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Exposure base method
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variable treated some as premium based method, but historical fixed expenses re divided by historical exposures or policy count rather than premium
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Distortions to exposure base
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requires actuary to judgmentally split the expenses into fixed and variable portions, the method allocated cw fixed expenses to each state based on the exposure or policy distribution by state, however, averaged fixed expense levels may vary by location, some expenses considered fixed actually vary by certain characteristics
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Loss Ratio method
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requires premium at current rate level, produces an indicated change to rates currently charged, preferable if exposure data is not available or if the product being priced does not have clearly defined exposures
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Pure Premium Method
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requires exposures, produces an indicated rate, preferable if premium is not available or if it is different to calculate premium at current rate level, better for new lines of business
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Trend estimate resulting from trending procedures
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point estimate, range of estimate, a point estimate with margin for adverse deviation, profitability distribution of the trend estimate
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Factors to consider when selecting historical insurance and non insurance data
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the credibility assigned to the data by the actuary, the time period for which the data is available, the relationship to the items being trended, and the effect of known biases or distortions on the data relied upon
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Considerations when determining trend period
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the lengths of experience and forecast periods, changes in the mix of data between the experience and forecast periods
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The actuary should disclose in actuarial communications (trends)
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the intended purpose or use of the trending procedure, including adjustments that the actuary considered appropriate in order to produce a single work product for multiple purposes or uses, significant adjustments to the data or assumptions in the trend procedure, that may have a material impact on the result or conclusions of the actuary’s overall analysis
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Statistical criterion for a potential rating variable
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statistical significance, homogeneity, credibility
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For a rating variable to be practical, it should be
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objective, inexpensive to administer, verifiable
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Major shortcoming of univariate approach
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failure to accurately account for the effect of other rating variables
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Shortcoming of Pure Premium Approach
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does not consider exposure correlations with other rating variables
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Shortcoming of Loss Ratio Approach
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uses current premium to adjust for an uneven mix of business to the extent the premium varies with risk, but premium is only an approximation since it deviates from true loss costs differentials
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Shortcoming of adjusting pure premium approach
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multiples exposures by the exposure weighted average of all other rating variables’ relativities to standardize data for the uneven mix of business before calculating the one- way relativities, but this is an approximation to reflect all exposure correlations
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Benefits associated with multivariate methods
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1) considers all rating variables simultaneously and automatically adjust for exposure correlations between rating variables, 2) allows for randomness in determining what is driving the cost of claims and to what degree, 3)the methods produce model diagnostics, 4) they allow interaction between two or more rating variables
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Univariate methods
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are distorted by distribution biases, require no assumptions about the nature of the underlying experience, produce a set of answers with no additional information about the certainty of the results, can incorporate interactions but only by expanding the analysis into two-way or three-way tables, scores high in terms of transparency
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Minimum bias methods
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account for an uneven mix of business but iterative calculations are computationally inefficient, require no assumptions about the structure of the model and the bias function, do not produce diagnostics, scores high on transparency and outperforms univariate analysis in terms of accuracy
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Reasons deductibles are used
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premium reduction, eliminates small nuisance claims, provides incentive for loss control, controls catastrophic exposure
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Small WC risks tend to have less favorable loss experience
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have less sophiscated safety programs because of the large amount of capital to implement and maintain, may lack programs to help injured workers return to work, premiums are unaffected or slightly impacted by experience ratings, small insureds may not be eligible for Experience rating and may have less incentive to prevent or control injuries than large insureds
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Credibility
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a measure of the predictive value in a given application that the actuary attaches to a particular body of data
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3 advantages using the classical credibility approach & 1 disadvantage
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most commonly used & thus generally accepted, data required is readily available, computations are straight forward disadv: simplifying assumptions may not be true in practice
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6 qualities of a complement of credibility
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accurate, unbiased, independent, available, easy to compute, logical relationship
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Regulatory constraints that cause insurers to implement rates different from those indicated
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1) regulations may limit the amount of an insurers’ rate change, 2) regulations requiring insurers to provide written notice to its insureds regarding the magnitude on the requested change, 3) regulations prohibiting the use of a characteristic for rating, 4) regulations prescribing the use of certain ratemaking techniques, 5) regulators disagreeing with the insurer’s actuarial ratemaking assumptions
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Insurer actions that can be taken with respect to regulatory restrictions
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1) an insurer can take legal action to challenge the regulation, an insurer may revise its U/W guidelines to limit business written at what it considers to be inadequate rate levels, 3) an insurer may change marketing directives to minimize new applicants whose rates are thought to be inadequate, 4) in the case of banned or restricted usage of a variable, an insurer can use a different allowable rating variable it believes can explain some or all of the effect associated with the restricted variable
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Operational constraints
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modifying rate algorithms can require significant system changes and the complexity of the change depends on the extent of the changes and number of systems, implementing a new rating variable may require data that has not been previously captured. May need additional staff with unique skills. Do a cost-benefit analysis
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Factors that affect an insured’s propensity to renew and existing policy or purchase a new policy
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price of competing products, overall cost of the product, rate changes, characteristics of the insured, customer satisfaction and brand loyalty
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Non-pricing solutions an insurer can implement when the indicated avg premium per exposure does not equal the projected avg exposure
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1) balance can be achieved through expense reductions, 2) balance can be achieved by reducing the average expected loss by changing the make up of the portfolio of insureds, by reducing the coverage provided by the policy or by instituting better loss control procedures
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Adjustments when using a competitor’s manual
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1) estimate whether its fixed expenses will be higher or lower than those of the target, 2) estimate whether variable expenses will be higher or lower, 3) estimate whether its expected loss costs will be different than target, 4) target certain segment of the market that the competitor does not seem to be targeting
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Asset share pricing is not yet common in P&C
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1) the data needed is not always available, 2) casualty pricing techniques are still somewhat undeveloped, 3) the casualty insurance policy allows greater flexibility in premiums and benefit levels, 4) liability claim costs are uncertain, both in magnitude and in timing
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Schedule Rating
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used to modify the manual rate, in commercial lines pricing to reflect characteristics' that are 1) expected to have a material effect on the insured's future loss experience but that are not actually reflected in the manual rate, or 2) not adequately reflected in the prior experience
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Elements provided by basic premium in retrospective rating
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1) insurer's target UW profit and expenses 2) cost of limiting the retrospective premium 3) cost of limiting each occurrence to a negotiated loss limitation
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5 principles of claims made ratemaking
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1) a claims made policy should always cost less than an occurrence policy as long as claim costs are increasing 2) if there is a sudden, unexpected change in the underlying trends, a claims made policy priced based on the prior trend will be closer to the correct price than an occurrence policy based on the prior trend 3) if there is a sudden, unexpected shift in the reporting pattern, the cost of a mature claims made policy will be affected relatively little if at all, relative to the occurrence policy 4) claims-made policies incur no liability for IBNR, so the risk of reserve inadequacy is greatly reduced 5) investment income earned from claims made policies is substantially less than under occurrence policies
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Retroactive date
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the date associated with a claims made policy for which coverage is provided for claims occurring on or after the retroactive date
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