BAIC 2 - Data Aggregation and Accounting

Question 1

Key dates for premium reporting

Answer 1

Effective Date and Expiration Date - Dates on which policy begins and ends respectively
Inception Date - Date policy initially coded; usually date in which coverage begins
Accounting Date - Date transaction entered in company’s financial books (done periodically - monthly/quarterly)

Question 2

Definition of Loss

Answer 2

Amounts paid or payable to claimants under the terms of an insurance policy

Question 3

Paid Losses

Answer 3

Losses for a particular period that have actually been paid to claimants

Question 4

Outstanding Losses

Answer 4

Estimate of additional losses expected to be paid (aka Case Reserve); represents information available at a specific point in time - may be re-evaluated

Question 5

Case Incurred Losses

Answer 5

Sum of Paid and Outstanding Losses

Question 6

Key dates for Loss Reporting

Answer 6

Accounting date - date entered in books
Accident Date - Day loss occurs (aka loss date, occurrence date, or incidence date)
Report Date - Date insurer notified of claim
Valuation Date - Date through which transactions are included in the evaluation of the claim, regardless of when the evaluation is performed

Question 7

Data Aggregation definition

Answer 7

Collection and summarization of information for purposes such as statistical analysis

Question 8

Who plays a part in data aggregation?

Answer 8

State insurance departments and regulatory agencies (NAIC) - verify accounting and tax information
Insurers and Reinsurers - supplement own data and research
Advisory organizations (including ISO) - produce reports on industry-wide trends

Question 9

ISO 6 uses of aggregated data

Answer 9

Trend and loss development factors
Increased limits factors
Size and cause of loss analyses
Expense and efficiency reports
Loss cost filings
Statistical reporting

Question 10

4 types of Exposure

Answer 10

Written Exposure - units of exposure on policies written during the period in question
Earned Exposure - exposure units actually exposed to loss during the period
Unearned Exposures - portion of written exposures not yet earned as of a given point in time
In-force Exposure - exposure units exposed to loss at a given point in time
**Similarly premium can be either written, earned, or un-earned

Question 11

Half-month Earning Routine

Answer 11

Assume that policies are written and effective uniformly throughout the year, therefore, the effective date is in the middle of the month (simplifies calculations)
Ex: If we know only that a policy became effective in July, 2007, then we assume the effective date is 7/15/2007

Question 12

Calculation of Earned Premium during period

Answer 12

Number of months(quarters) effective during period / total number of months(quarters) in policy duration * written premium

Question 13

Calculation of Earned Premium during period

Answer 13

Number of months (quarters) effective during period / total number of months (quarters) in policy duration * written exposures

Question 14

Half quarter earning routine

Answer 14

• Assume policies are effective uniformly throughout the year
• Therefore the policy is effective in the middle of the quarter
• Simplifies calculation sfor large groups of policies

Question 15

Four common methods to calculate incurred losses

Answer 15

Policy Year Method
Calendar Year Method
Accident Year Method
Report Year Method

Question 16

Calendar Year method

Answer 16

EP = Written Premium in CY - change in UEPR
IL = Paid Loss in CY + change in outstanding loss

Question 17

Accident Year (AY) or Report Year (RY) method

Answer 17

EP = Written Premium in CY - change in UEPR
IL = Cumulative Paid + Outstanding (as of date) including only losses occurring during the AY (for AY method) or RY (for RY method)

Question 18

Policy Year (PY) method

Answer 18

EP = Written Premium on the policies in the PY - Unearned Premium on those policies (as of date)
IL = Cumulative Paid + Outstanding (as of date), including only losses on policies written in PY

Question 19

Overview of Policy YEar method

Answer 19

• Losses are the least stable, since the data is the most immature at any given evaluation date
• Perfectly matches premium and exposure to the losses
• Used for pricing and profitability studies

Question 20

Overview of Calendar Year Method

Answer 20

• Most stable (because based on accounting records, which are frozen at the end of the fiscal year)
• Premium and loss do not need to be re-evaluated
• Limited use in actuarial analysis except in very short-tailed lines of business
• Used for tax and accounting purposes since they reflect activity during the fiscal year

Question 21

Overview of Accident Year Method

Answer 21

• Data stability falls between PY and CY since the losses evaluated are more mature than PY losses, but require re-evaluation as they do change over time
• Generally viewed as most reflective o fthe industry’s current financial situation
• Used for reserving and pricing

Question 22

Overview of Report Year Method

Answer 22

• Relatively uncommon
• Primarily used for long-tailed lines that employ claims-made policies such as Medical Malpractice and Professional Liability
• Used to help increase the responsiveness of pricing to the current cost of claims
• May also be used by claims departments to analyze payment patterns and efficiency