Werner & Modlin 6

Front 1

Adjustments to losses

Back 1

adjustments to project to level expected when rates will be in effect

1. extraordinary losses
2. chgs in coverage or benefit levels
3. loss development
4. loss trend

Front 2

Extraordinary losses

Back 2

1. large indiv losses
2. cat losses
3. reinsurance

Front 3

large loss definition

Back 3

infrequent indiv losses for extremely large amts (e.g., total loss on high-valued home, total permanent disability of a young worker)

Front 4

cat definition

Back 4

event whose losses are very large and very infrequent such that their inclusion in a normal rate review would severely distort the estimation of future expected losses. ISO defines CAT as event causing losses >= $25M and affect significant number of p/h and insurers

Front 5

Chgs in coverage or benefit levels - 2 types of effects

Back 5

1. direct effect: can be calculated (e.g., chg in ded levels)

2. indirect effect: develop from chgs in claimant behavior due to benefit chg. This is a function of the economic environment and nature of insured pop --> w/o data to estimate, must use judgment

Front 6

Leveraged effect of limits on severity trend

Back 6

with positive trend:
BL trend <= TL trend <= XS loss trend

underlying cause of varying trends by limit is that loss amts are trending upward but limits of liab are not

portions of losses below layer are removed from both pre- & post-trend loss which poduces leveraged effect

Front 7

Overlap fallacy - what is it?

Back 7

Has been incorrectly suggested that sev trend is double counted when both loss development ans severity trend factors are applied to losses

Front 8

Overlap fallacy - why is it wrong?

Back 8

Loss trend gets the experience period historical losses to the cost level of the avg loss in prospective experience period. The loss development factor accounts fro the development of the avg prospective loss to its ult settlement value