cpcu 520 ch9 review notes

Question 1

ratemaking goals

Answer 1

develop rate structure that enables insurer to compete effectively while earning reasonable profit (primary), premiums covera ll losses/expense w/ reasonable amt left for profit, comply w/ applicable regulations

Question 2

ideal characteristics of rates

Answer 2

stable, responsive, provide for contingencies, promote risk control, reflect differences in risk exposure

Question 3

insurance rate components

Answer 3

amt needed to pay future claims/loss adjustment expenses (prospective loss costs), amt needed to pay future expenses (expense provision), amt for profit and contingencies (profit/contingencies factor)

Question 4

earned exposure unit

Answer 4

unit for which insurer has provided full period of cov’g

Question 5

pure prem

Answer 5

required to pay losses, aka loss cost

Question 6

expense provision

Answer 6

added to pure prem amt required to pay expenses, aka underwriting expenses

Question 7

loss adjustment expenses

Answer 7

exp assoc w/ adjusting claims (allocated or unallocated)

Question 8

loading for profit/contingencies

Answer 8

protects insurer against possibility that actual losses/expenses will exceed projected included in the ins rate

Question 9

investment return earned by an insurer depends on

Answer 9

types of insurance written, loss reserves, assoc unearned prem reserves

Question 10

key to developing ins rates adequate to pay future claims

Answer 10

estiamting amt of losses for those claims

Question 11

ratemaking based on

Answer 11

estimating losses from past covg periods and adjusting those losses for future conditions

Question 12

incurred losses

Answer 12

paid losses and outstanding reserves

Question 13

delay in reflecting loss exp in rates due to

Answer 13

delays by insds in reporting losses
time req to analyze data/prepare filing
delays in obtaining state appr of filed rates
time req to implement new rates
time period during which rates are in effect, usually a full year

Question 14

Three ratemaking methods

Answer 14

pure prem method
loss ratio method
judgement rating method

Question 15

pure prem method

Answer 15

uses loss per exposure based on past exp as basis for rate. Four steps: calcualte pure prem, estimate expenses per exp unit based on past expenses, determine profit/contingencies factor, add pure prem and expense provision and divid by one minus profit and contingencies factor

Question 16

fixed expenses

Answer 16

stated as dollar amt per exposure unit

Question 17

variable expenses

Answer 17

stated as percentage of the rate

Question 18

loss ratio ratemaking method

Answer 18

used two ratios - actual & expected.

Question 19

expected loss ratio plus provision for expenses, profit, contingencies add up to

Answer 19

100%

Question 20

methods used for new type of insurance

Answer 20

pure premium or judgement method

Question 21

judgemetn ratemaking method

Answer 21

ocean marine, inland marine, aviation, situations w/ limited data, uses limited or no loss exp data

Question 22

four steps in ratemaking process

Answer 22

collect data, adjust data, calculate indicated overall rate change, determine territorial and class relativities, prepare/submit rate filings

Question 23

claim data collected when

Answer 23

claims reported, reserves established/changed, chks/drafts issued, claims closed

Question 24

general data categories

Answer 24

losses, both pd and incurred (incl LAE), earned prem/exposure info, expenses incl profit/contingency factor

Question 25

ways of adjusting prem/loss data

Answer 25

adjust prem to current rate level, adjust historic experience for future development, apply trending to losses and prem

Question 26

most frequently used source of trends

Answer 26

historial experience

Question 27

relativities

Answer 27

reflect extend to which various subsets of insds in a state deserve rates that are higher or lower than the statewide avg

Question 28

territorial relativities determined by

Answer 28

comparing estimated LR or pure prem for each geographic territory to the statewide avg LR or pure prem

Question 29

class relativities

Answer 29

used to develop rates for each rating class

Question 30

rate filing must include

Answer 30

schedule of proposed new rates
statement abt percntage change in statewide avg rate
explanation fo diff btwn overall statewide chg in rate and percentage chg of rates for individ territories and/or rating classes
data to support proposed rate chgs
expense provision data
target profit provision incl in rates and supporting calcs
explanatory material to endable state ins regulators to understand/evaluate filing

Question 31

policy year method

Answer 31

involves analyzing earned prem, exposure units, incurred losses assoc with a particular grp of policies issued during a specific twelve month period (spans two years to accomodate 12/31 issuance). Only method matching losses, prem, and exposure units to spec grp of insureds. Disadvantages: longer to gather data, addt’l expense

Question 32

calendar year method

Answer 32

aggregates data from acct records to estiamte earned prem and incurred losses. Earned prem must be calc’d from written prem and unearned prem reserves. incurred losses must also be estimated

Question 33

earned prem =

Answer 33

written prem for year plus diff btwn unearned prem at beginning of yr and unearned prem at end of year

Question 34

incurred losses =

Answer 34

losses pd during year plus diff btwn loss reserves @ end of yr and loss reserves @ beginning of year

Question 35

calendar year data reflects

Answer 35

how insurers must report income on financial statements

Question 36

least accurate ratemaking data colelction method

Answer 36

calendar year method

Question 37

accident year method

Answer 37

uses earned prem for calendar period being reviewed but calc’s incurred losses for given period using all losses & claims arising fr insured events occurring during that period - achieves accuracy of policy year method while preserving economy/speed of calendar yr method. required to be reported by line of business in annual statement.

Question 38

report year method

Answer 38

similar to acc year method except claims are aggregated by when claim was reported rather than when occurred

Question 39

least common of loss agg methods

Answer 39

report year collection

Question 40

differences btwn ratemaking for diff lines of bus

Answer 40

experience period
trending
large loss limitations
credibility
increased limits factors

Question 41

factors in determining appropriate exp period

Answer 41

legal requirements
variability of losses over time
credibility of resulting ratemaking data

Question 42

losses trended to

Answer 42

reflect effects of inflation on claim costs

Question 43

trending prob in wc ins

Answer 43

benefits established by statute, legistlation or ct decisio can change benefits unexpectedly

Question 44

basic limit losses

Answer 44

losses capped at some predetermined amt, used in calc’ing incurred losses in liab insurance to control fluctuations

Question 45

credibility factor

Answer 45

used as the weight in weighted avg - 0 no credibility, 1- full confidence

Question 46

pure prem for wc

Answer 46

composed of pure prem charges for medical and indemnity costs

Question 47

increased limits ratemaking techniques

Answer 47

develop increased limits factors (most common method)

Question 48

reason for charges for increased limits exceeding 100% of chg for basic covg limits

Answer 48

addt’l coverage purchased can be migher than basic limit
higher limits can require portion of covg to be reinsured, increasing rate
lg losses occur less freq than small losses, taking longer to settle–variability in higher covg layers great than for basic limit losses, credibility is lower

Question 49

principal types of loss reserves

Answer 49

case reserves, bulk reserves

Question 50

bulk/aggregate reserve components

Answer 50

incurred but not reported reserves, reserves for losses reported but for which reserves are inadequate, reserves for claims settled then reopened

Question 51

common methods used to estimate ultimate losses

Answer 51

expected loss ratio method–uses prior estimate of ultimate losses, ignores exp to date
loss development method (most common)–assumes future chagnes in loss will occur in similar manner as in past, assumes experience to date inicates what future pmts will be
borneutter-ferguston mthod uses parts of other two, accepts exp to date and assumes future results independent of current exp. Sum of actual results to date plus expected future results.

Question 52

loss dev method steps

Answer 52

compile experience into loss dev triangle, calculate age to ave factors, select loss development factors, apply factors to exp to make projections. limitation - changes in bus practices affect usefulness, catastrophes would disrupt historical pattern of dev

Question 53

on level factor

Answer 53

factor used to adj historical prem to curent rate level

Question 54

schedule P

Answer 54

NAIC ann statemet sched that shows detailed historial info on pd and reserves losses and LAE

Question 55

claims made covg

Answer 55

covg triggered by claim alleging bodily injury or prop dmg made during policy period, even if claim arises from event happening before policy inception

Question 56

risk chg

Answer 56

amt above expected loss component of prem to compensate insurere for taking risk that losses may be higher than expected