Chapter 7: Actuarial Operations Flashcards

1
Q

Actuarial Functions

A
  • Ratemaking

- Estimation of unpaid liabilities and adequacy of loss reserves

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2
Q

Ideal Characteristics of Rates

A
  • Be stable
  • Be responsive
  • Provide for contingencies
  • Promote risk control
  • Reflect differences in risk exposure
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3
Q

Rate Components

A
  • An amount needed to pay for future claims and loss adjustment 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)
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4
Q

Factors That Affect Ratemaking

A
  • Estimation of losses
  • Delays in data collection
  • Change in the costs of claims
  • Insurer’s projected expenses
  • Target level of profit and contingencies
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5
Q

Estimation of Losses

A

Paid Losses + Loss Reserves = Incurred Losses

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6
Q

Delays in Data Collection and Use

A
  • Delays by insured in 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
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7
Q

Ratemaking Methods

A
  • Pure premium method
  • Loss ratio method
  • Judgement method
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8
Q

Pure Premium Ratemaking Method

A
  1. ) Calculate the pure premium
  2. ) Estimate expenses per exposure unit based on the insurer’s last experience
  3. ) Determine the profit and contingencies factor
  4. ) Add pure premium and the expense provisions and divide by one minus the profit and contingencies factor
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9
Q

Ratemaking Process Overview

A
  1. ) Collect data
  2. ) Adjust data
  3. ) Calculate overall indicated rate change
  4. ) Determine territorial and class relativities
  5. ) Prepare rate filings and submit to regulatory authorities as required
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10
Q

Collect Data

A

Three General Categories:

  • Losses, both paid and incurred
  • Earned premiums and/or exposure Information
  • Expenses, including a profit and contingencies factor
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11
Q

Adjust Data

A
  • Adjust premium to current rate level
  • Adjust historic experience for future development
  • Apply trending to losses and premium
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12
Q

Ratemaking Factor Variance for Different Types of Insurance

A
  • Experience period
  • Trending
  • Large loss limitations
  • Credibility
  • Increased limits factors
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13
Q

Experience Period

A

Factors in determining the appropriate experience period:

  • Legal requirements (if any)
  • The variability of losses over time
  • The credibility of the resulting ratemaking data
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14
Q

Types of Loss Reserves

A
  • Case reserves
    • Amounts that represent the estimated loss value of each individual claim
  • Bulk reserves
    • General provision for additional reserves, since the insurer cannot identify specific claims with inadequate or excessive case reserves or predict which claims reopen
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15
Q

Bulk Reserves

A

Bulk Reserves can have three components:

  • Incurred but not reported (IBNR) Reserves
  • Reserves for losses that have been reported but for which the established case reserves are inadequate (IBNER- incurred but not enough reserves)
  • Reserves for claims that have been settled and the reopened
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16
Q

Analysis of Loss Reserves

A

The most common methods used estimate ultimate losses are:

  • Expected loss ratio method
  • Loss development method
  • Bornhuetter-Ferguson method
17
Q

The Loss Development Method

A
  1. ) Compile the experience into a loss development triangle
  2. ) Calculate the age-to-age development factors
  3. ) Select the development factors to be used
  4. ) Apply factors to experience to make projections