Flashcards in Study 7 - Pricing the Risk Deck (38)
Define pure premium
Portion of the total premium that is needed to pay expected losses. It does not take into account money needed for company expenses
The price of insurance protection for a specified risk for a specified period of time
Define acquisition cost
The cost of putting a business on the books and acquiring the premium. The items involved are not standard with all insurers, but generally may include items such as commissions, field representative costs, premium tax, and perhaps some of the relevant head office acquisition costs of operation
Compensation based on the amount of production; for example, independent insurance agents are compensated on the basis of a percentage of the premium. The percentage varies with different lines of insurance
What are development factors?
Adjustments to current reserves for claims that have yet to be settled
What are trend factors?
Adjustments applied to all losses to reflect what they would probably cost if they were to occur next year rather than having occurred at some time in the past
What are administrative expenses?
General expenses incurred to operate the
ie. Buying/leasing equipment, purchasing office supplies, paying salaries and benefits for staff, and covering interest costs on debt
What are six common items go into allocating premium?
Pure premium, development factors, trend factors, acquisition costs, administration expenses, profit
What are ULAEs?
Unallocated loss adjustment expenses
Cannot be attached or attributed to a single claim
Define underwriting profit
The amount of money an insurance company gains as a result of its insurance operations. Excess of earned premiums collected over loss payments and expenses
Define underwriting loss
The amount of money that an insurance company loses as a result of its insurance operations, it excludes investment transactions and income taxes
What is often used to offset underwriting losses?
One who specializes in the mathematics of insurance, mortality rates and the like
The process of compiling and analyzing data to establish rates that accurately reflect the level of risk. Usually performed by actuaries
Amount charged to an insured that reflects the expectation of loss for a covered risk, insurance company expenses, and profit. In other words, it is the basis of premium calculation for the insurance provided for the exposure
What are the three major components of any rate?
- Anticipated cost of settling claims
- Acquisition costs of the business, such as commissions
- Cost of administering the process, including taxes levied on the premiums
What two conditions ensure rate adequacy?
- Actuarial forecast of future losses based on past losses is accurate for the population
- Sample represented by the book of business written by a particular underwriter or insurer is representative of the population
What is the 8-step process is establishing rate adequacy?
1) Classify risks based on the types of objects of insurance, hazards of exposure, or both
2) Determine the number and nature of the rating classes
3) Select the proper measure of exposure
4) Gather loss statistics
5) Predict future losses based on past losses
6) Calculate the pure premium from the predicted losses
7) Calculate the total premium
8) Calculate the premium rate or unit cost
What is the exposure base?
The denomination in which the unit of exposure is express
What is the exposure unit?
A specified amount of the exposure base
What is ASP?
Automobile Statistical Plan
A collection of statistical information that all automobile insurers who write business in Canada must record and file as prescribed by the Superintendent of Insurance. Commonly known as the Green Book.
What is GISA?
General Insurance Statistical Agency
What three plans are administered by GISA?
Automobile Statistical Plan
Ontario Statutory Accident Benefits Statistical Plan
Ontario Commercial Liability Statistical Plan
Define law of large numbers
The mathematical premise that states that the degree of uncertainty is reduced as the number of events increases
What two things are used to predict future losses?
The law of large numbers
Theory of probability
What three major aspects of statistics are also considered?
Size of the sample
Time period over which the sample was taken
Past and future conditions
What are the two basic approaches to rating?
When is class rating used?
When statistics can be gathered on a large number of risks that share common characteristics
What three categories can losses be subdivided into under class rating?
Type of unit insured
Value of the unit insured