Chapter 7

Question 1

Actuary

Answer 1

professional who evaluates the financial consequences of future events

Question 2

actuarial operations

Answer 2

• Responsible for insurer operates effectively and conducts its operations on a financially sound basis
• Ratemaking
• Estimation of unpaid liabilities and adequacy of loss reserves
• Put a price tag on risk
• Use predictive models

Question 3

Data mining

Answer 3

the process of extracting hidden patterns from data that is used in a wide range of applications for research and fraud detection

Question 4

Other tasks of acutaries

Answer 4

• Analyzing reinsurance needs
• Estimating future cash flows so assets are available
• Assessing corporate risk by testing the adequacy of surplus under potential adverse conditions
• Providing financial and statistical info. To regulators and applicable statistical agents
• Participating in corporate planning and budgeting

Question 5

Ratemaking

Answer 5

the process insurers use to calculate insurance rates which are a premium component

Question 6

Ratemaking Goals

Answer 6

Develop a rate structure that enables the insurer to compete effectively while earning a reasonable profit on its operations

Question 7

ideal characteristics of rates

Answer 7

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

Question 8

Be stable

Answer 8

• Changing rates is expensive and time consuming
• Generally, rates are changed annually
• They should be stable enough that they don’t change dramatically

Question 9

Be responsive

Answer 9

• Rates should include good estimates for losses and expenses that arise from coverage
• The most recent claim ought to predict future experience better than older experience

Question 10

Provide for contingencies

Answer 10

• Future events can’t be accurately predicted, and insurer must pay even if costs are higher than estimated
• Rates should provide for this – provides greater security that insurer will be able to meet its obligations to potential claimants

Question 11

Promote risk control

Answer 11

• Provide lower rates for policyholdeers who exercise sound risk control
• Ex: install burglar alarm systems get a reduction in crime insurance rates
• Ex: persons who use their cars for business, generally pay higher rates

Question 12

Rate

Answer 12

the price per exposure unit for insurance coverage

Question 13

Rate Components

Answer 13

• An amount needed to pay future claims and loss adj expenses (prospective loss costs)
• An amount needed to pay future expenses, such as acquisition expenses overhead, and premium taxes (expense provision)
• An amount for profit and contingencies (profit and contingencies factor)

Question 14

Premium

Answer 14

the price of the insurance coverage provided for a specified period

Question 15

Exposure base

Answer 15

a variable that approximates the loss potential of a type of insurance

Question 16

exposure base for property

Answer 16

the value being insured

Question 17

exposure base for product liability

Answer 17

the exposure is sales

Question 18

Pure premium

Answer 18

the average amount of money an insurer must charge per exposure unit in order to be able to cover the total anticipated losses for that line of business

Question 19

Expense provision

Answer 19

the amount that is included in an insurance rate to cover the insurer’s expenses and that might include loss adjustment expenses but that excludes investment expenses

Question 20

Underwriting expenses

Answer 20

costs incurred by an insurer for operations, taxes, fees, and the acquisition of new policies

Question 21

Loss adjustment expense

Answer 21

the expenses that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy

Question 22

Allocated loss adjustment expenses

Answer 22

the expense an insurer incurs to investigate, defend, and settle claims that are associated with a specific claim

Question 23

Unallocated loss adjustment expense

Answer 23

loss adjustment expense that cannot be readily associated with a specific claim

Question 24

factors that affect ratemaking

Answer 24

• estimation of losses
• delays in data collection and use
• change in the cost of claims
• insurer’s projected expenses
• target level of profit and contingencies

Question 25

Loss reserves

Answer 25

the difference btw the estimate amount that will be paid for claims and the actual loss amount paid to date

Question 26

Ultimate loss

Answer 26

the final paid amount for all losses in an accident year

Question 27

Incurred losses

Answer 27

paid and reserves

Question 28

Sources of delays

Answer 28

- Delays in insured reporting losses to insurers - Time required to analyze data and prepare a rate filing - Delays in obtaining state approval of filed rates - Time required to implement new rates - Time period during which rates are in effect usually a full year

Question 29

Changes in the cost of claims can come from

Answer 29

- Inflation can cause changes in the cost of loss | - Regulation and legislative changes can affect the frequency of losses

Question 30

Target level of profit and contingencies

Answer 30

Consideration is given to the overall desired rate of return, including likely returns from investment income vs. underwriting profit

Question 31

Investment income

Answer 31

interest, dividends, and net capital gains received by an insurer from the insurer’s financial assets minus its investment expenses

Question 32

Lost cost multiplier

Answer 32

a factor that provides for difs. In expected loss, individual company expenses, underwriting profit, and contingencies, when multiplied with a loss cost, it produces a rate

Question 33

Calendar year

Answer 33

data collection method that estimates both earned premiums and incurred losses by formulas from accounting records

Question 34

Policy year

Answer 34

data collection method that analyzes data that in a given twelve month period an that links all losses, premiums, and exposure units to the policy to which they are related

Question 35

Accident year

Answer 35

data collection method that uses incurred losses for an accident year, which consist of all losses related to claims arising from accidents that occur during the year and that estimates earned premiums by formulas from accounting records

Question 36

ratemaking process

Answer 36

- collect data - adjust data - calculate overall indicated rate change - determine territorial and class relatives - prepare rate filings and submit to regulatory authorities as required

Question 37

Adjust premium to current rate level

Answer 37

- If rates charged in the experience period were written at different rate levels, premiums will need to be adjusted to the current level - Ideally this is done by calculating the premium for each policy in the experience period at current rate level

Question 38

Adjust historic experience for future development

Answer 38

- When policy year or accident year experience is used to predict future results, one must remember that the experience might not be complete (open claims, late reported claims, etc.) - Insurer must estimate the values of these future payments and add it to the payment to date in order to estimate the ultimate losses of each period

Question 39

Apply trending to losses and premium

Answer 39

-The review of historic environmental changes and projecting such changes into the future

Question 40

On level factor

Answer 40

a factor that is used to adjust historical premiums to the current rate level

Question 41

Loss development factor

Answer 41

an actuarial means for adjusting losses to reflect future growth in claims due to both increases in incurred amount for reported losses and incurred but not reported losses

Question 42

Exponential trending

Answer 42

a method of loss trending that assumes a fixed percentage increase of decrease for each time period

Question 43

Incurred but not reported reserves

Answer 43

a reserve established for losses that reasonably can be assumed to have been incurred but not yet reported