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Flashcards in CPCU 520: All Formulas Deck (41)
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1
Q

UW Gains or Losses

A

Earn Premiums - Losses + Expenses

Measures: UW Performance

2
Q

Loss Ratio

A

Incurred Losses / Earned Premiums

Measures: UW Performance

3
Q

Expense Ratio

A

UW Expenses / Written Premiums

Measures: UW Performance

4
Q

Combined Ratio (Trade Basis)

A

Loss Ratio + Expense Ratio

Measures: UW Performance

5
Q

Investment Income Ratio

A

Net Investment Income / Earned Premiums

Measures:Overall Operating Performance

6
Q

Overall Operating Ratio

A

Combined Ratio - Investment Income Ratio

Measures:Overall Operating Performance

7
Q

Return on Equity Ratio (aka Policyholder Surplus)

A

(GAAP Basis) = Net Income / Average Owners’ Equity (SAP Basis) = Net Income / Average Policyholders Surplus
Measures:Overall Operating Performance

8
Q

Chronology of a Rate Filing

A

See the following notecards

9
Q

Year 1 - 1/1

A

Start of the Experience Period

10
Q

Year 3 -12/31

A

End of Experience Period

11
Q

Year 4 - 3/31

A

Start of data collection and analysis

12
Q

Year 4 - 7/1

A

Rates filed with regualtors

13
Q

Year 4 - 9/1

A

Approval of rates received

14
Q

Year 5 - 1/1

A

New rates initially used

15
Q

Year 5 - 12/31

A

Rates no longer used

16
Q

Year 6 - 12/31

A

Last loss incurred under this rate filing

17
Q

Policy Year Timeframe

A

1/1/x1 - Beginning of Policy Year
12/31/X1 - Last Policy Issued for this Policy Year
12/31/X2 - Policy issued 12/31/X1 Expire

18
Q

Ratemaking Methods

A
  1. Pure Premium
  2. Loss Ratio
  3. Judgment Method
19
Q

Pure Premium Method

A

Step 1: Incurred Losses/Total Unit Years ($40)
Step 2: Expenses / Total Unit Years (e.g. $17)
Step 3: Step 1 + Step 2 (e.g. 57) / 1- %PC (e.g. %5)
Answer = $60

Purpose: To develop rates from past experience (cannot be used without past experience)

20
Q

Ratio Method

A

Actual Loss Step 1: Incurred Losses / Earned Premiums
Expected Loss Step 2: 100% - Expense Provision
Step 3: Actual Loss - Expected Loss / Expected Loss

Purpose: To modify existing rates (cannot be used without existing rates; cannot be used to determine rates for a new type of insurance).

21
Q

Judgment Method

A

No Formula: Used in Ocean Marine, Inland Marine, Aviation

Purpose: To develop rates when data are limited (requires skilled judgment)

22
Q

Surplus Share Reinsurance Loss Sharing

A

PI is responsible for a proportional amount (expressed in $ or %). If it retains a line (e.g.$25,000). It is responsible for loss < $25,000 and contributes $25,000 to a loss above that amount.

Example:
Line of $25,000: Loss of $100,000; PI pays $25,000; RI Pays $75,000
Retention of 25%: Loss of $150K; PI pays 25K, RI pays $112,500

23
Q

Surplus Share Reinsurance Premium Sharing

A

Line (PI) $50k; Ceded (RI) $200k; for a total of $250k; PI would pay 20% ($50k / $250K) of Premiums and Losses. RI would pay 80% $200k / $250k)

24
Q

Excess of Loss Reinsurance

A

$500,000 x $500,000

Translation: RI would indemnify PI for losses that exceeded $500,000 for losses up to $1,000,000 (500k+500k).

25
Q

Co-Participation Provision

A

Purpose: To encourage PI to efficiently manage losses that exceed attachment point.Denoted as a % above the layer.

Example: If co-participation clause is 5%, the layer would be specified as 95% of 20,000,000 x 5,000,000 (RI’s responsiblity).

26
Q

Per Risk Excess of Loss

A

The “in excess of” (x) amts apply to each risk (e.g. building).

Example:
$950k x $50k Coverage
Three buildings are damaged by tornadio with a RI payment of $1,400,000. RI pays it all because the three buildings each represent a risk. If a Per-Occurance limit applied, it would have only paid $1,000,000.

27
Q

Per Policy Excess of Loss

A

The “in excess of” (x) amts apply to each policy.

Example:
$900k x $100k Coverage
Loss occured on three different policies with a RI payment of $1,100,000 total. RI pays it all because the excess of loss allows for up to a $1,000,000 RI payment for each policy.

28
Q

Calculating net underwriting gain or loss

A

Earned premiums - (incurred losses + underwriting expenses)

29
Q

Formula for overall gain or loss from operations

A

Net underwriting gain or loss + investment gain or loss

30
Q

Lapse ratio

A

Number of policies that lapse during a period / total number of policies written at the beginning of that period.

31
Q

Operating ratio

A

Combined ratio after dividends - net investment ratio

32
Q

Combined ratio

A

Loss ratio + expense ratio

33
Q

Expense ratio

A

Incurred underwriting expenses / written premiums

34
Q

Combined ratio ( trade basis)

A

[Incurred losses including LAE/ earned premiums] + [incurred underwriting expenses/ written premiums]

35
Q

Loss ratio

A

Incurred losses / earned premiums

36
Q

Policyholder surplus

A

Total admitted assets minus total liabilities

37
Q

Return on equity

A

Net income/ net worth (book value). Can be called shareholders equity, owners equity, policyholder surplus depending on context

38
Q

Determining business income loss

A

Revenue - cost of goods sold - discontinued operating expenses

Or

Net profit (or loss) plus operating expenses that continue

39
Q

Earned premiums

A

Written premiums for the year + the difference between unearned premiums at the beginning of the year and unearned premiums at the end of the year

40
Q

Rate making using the pure premium method

A

Calculate pure premium
Estimate expenses per exposure unit based on insurer past expenses
Determine profit and contingencies factor
Add the pure premium and the expense provision and divide by 1 minus the profit and contingencies factor

41
Q

Incurred losses

A

Losses paid during the year + difference between loss reserves at the end of the year and loss reserves at the beginning of the year