Spring 2011 Exam 5

Front 1

What are the three criteria of a good exposure base?

Back 1

1. Propotional to expected loss: Should select variable with the most direct relationship to loss. Should adjust based on modifications to exposure of the risk to a loss.
2. Practical: Should be objective, well-defined, and relatively easy to obtain and verify.
3. Historical precedent: a previously unused exposure based could case significant variation in premium, a need to modify systems, and a need to collect new data.

Front 2

Fully explain the overlap fallacy between loss development and loss trend.

Back 2

There is no overlap when developing loss and trending loss. Trending loss will rend loss from the midpoint of experience period to the midpoint of the exposure period. Developingloss will develop loss from the midpiont of the exposure period to the ultimate.

Front 3

Identify whether the loss ratio or pure premium ratemaking is preferrable:
A company introduced two new rating variables within the past year.

Back 3

Pure premium - brining historical premium to CRL with the new variables may be difficult.

Front 4

Identify whether the loss ratio or pure premium ratemaking is preferrable:
A company is entering a new line of business.

Back 4

Pure premium - there is no existing rate to which an indicated change can be applied.

Front 5

Identify whether the loss ratio or pure premium ratemaking is preferrable:
A company writes a commercial product with multiple exposure bases.

Back 5

Loss ratio - an accurate & consistent exposure measure will be difficult to calculate.

Front 6

Describe two primary purposes of risk classification.

Back 6

1. To ensure the insurance system's financial soundness by protecting it against adverse selection, which happens in a competitive environment when other are using risk classification.
2. To be fair. Risk classification allows the insurer to better match expected costs and premium for the policy holders based on how they classify with respect to exposure to risk.

Front 7

Identify four characteristics of the data from a long-tailed, low-frequency LOB and from a short-tailed, high-frequency LOB that should be considered before combining these lines to estimate unpaid claims.

Back 7

1. Credibilty of Data: Should consider if each line has large enough volume of data to be credible. If not, combining the data may be the alternative.
2. Severity (average claim size): Average claim size for each line should be considered since this will distort the results from the various estimation techniques and thus the estimated claim would be inaccurate. Usually, long-tailed-low-frequency has higher severity than short-tailed high frequency.
3. Case reverse adequacy: Review the case reserve philosophy on each line of business. Different reserving practice may affect the results of estimated unpaid claims.
4. Claim settling rate:
Consider the differences between the claim settlement rate. This is crucial because the long-tailed low frequency may have longer reporting pattern and thus the resulting development factors may be distorted by this and affecting the unpaid claim estimate.

Front 8

An insurance company uses both the reported claim development method and the paid claim development method to estimate unpaid claims for its automobile liability business. A state enacts legislation creating a court that specializes in hearing insurance liability claims to combat a back-log of liabiltiy cases in the regular court system. Briefly describe the expected impact of the legislation on the estimated unpaid claims in this state for each method and discuss a diagnostic test that would indicate whether the expected impact of the change is present in the data.

Back 8

Will cause speed-up in claim settlement.
Paid method - will overstate ult. because development factors are selected based on old pattern.
Reported method - accurate assuming reserves were set correctly and unaffected by this change.
Look at ratios of paid-to-reported claims. They will show if there is speedup.

Front 9

An insurance company uses both the reported claim development method and the paid claim development method to estimate unpaid claims for its automobile liability business. A state enacts tort reform legislation that places caps on non-economic damages awarded in automobile liability lawsuits. Briefly describe the expected impact of the legislation on the estimated unpaid claims in this state for each method and discuss a diagnostic test that would indicate whether the expected impact of the change is present in the data.

Back 9

Will cause lower severity.
Both methods will produce inaccurate estimates (overstated) if unadjusted for tort reform impact.
Look at average paid and average reported - they will show decrease.

Front 10

An insurance company uses both the reported claim development method and the paid claim development method to estimate unpaid claims for its automobile liability business. A state enacts legislation creating a court that specializes in hearing insurance liability claims to combat a back-log of liabiltiy cases in the regular court system. Briefly describe the expected impact of the legislation on the estimated unpaid claims in this state for each method and discuss a diagnostic test that would indicate whether the expected impact of the change is present in the data.

Back 10

Will cause speed-up in claim settlement.
Paid method - will overstate ult. because development factors are selected based on old pattern.
Reported method - accurate assuming reserves were set correctly and unaffected by this change.
Look at ratios of paid-to-reported claims. They will show if there is speedup.

Front 11

An insurance company uses both the reported claim development method and the paid claim development method to estimate unpaid claims for its automobile liability business. To gain market share, company management is focusing on writing $1,000,000 policy limits whereas previously policies were written with $500,000 policy limits. Briefly describe the expected impact of the legislation on the estimated unpaid claims in this state for each method and discuss a diagnostic test that would indicate whether the expected impact of the change is present in the data.

Back 11

Increase in losses due to writing higher limits.
Both methods will produce inaccurate estimates (understated) - old data will have smaller development factors because policy limits were reached quicker.
Look at average paid, average reported, and ultimate loss ratios - they all should show increase.

Front 12

An insurance company uses both the reported claim development method and the paid claim development method to estimate unpaid claims for its automobile liability business. A state enacts tort reform legislation that places caps on non-economic damages awarded in automobile liability lawsuits. Briefly describe the expected impact of the legislation on the estimated unpaid claims in this state for each method and discuss a diagnostic test that would indicate whether the expected impact of the change is present in the data.

Back 12

Will cause lower severity.
Both methods will produce inaccurate estimates (overstated) if unadjusted for tort reform impact.
Look at average paid and average reported - they will show decrease.

Front 13

An insurance company uses both the reported claim development method and the paid claim development method to estimate unpaid claims for its automobile liability business. To gain market share, company management is focusing on writing $1,000,000 policy limits whereas previously policies were written with $500,000 policy limits. Briefly describe the expected impact of the legislation on the estimated unpaid claims in this state for each method and discuss a diagnostic test that would indicate whether the expected impact of the change is present in the data.

Back 13

Increase in losses due to writing higher limits.
Both methods will produce inaccurate estimates (understated) - old data will have smaller development factors because policy limits were reached quicker.
Look at average paid, average reported, and ultimate loss ratios - they all should show increase.