# - TIA EXAM 5 - WERNER CH 15.txt

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1. Considerations when pricing Commercial Insurance Products
• 1. Creation of homogeneous groups for ratemaking purposes not feasible
• 2. Some commercial risks are large enough to use their own experience (in whole or part) to price
• 3. Individual Risk Rating (IRR):
• Price coverage provided more accurately than if rates were based in manual rates only
• Balance risk sharing and risk bearing
2. Manual rate modification mechanisms
• Experience rating
• Schedule rating
3. Rating techniques for large commercial insureds
• Large deductible plans
• Loss-rated composite rating
• Retrospective rating plans
4. Actual and expected experience may be compared in following ways for experience period
• Actual paid loss & ALAE with expected paid loss & ALAE
• Actual reported loss & ALAE with expected reported loss & ALAE
• Projected ultimate loss & ALAE with expected ultimate loss & ALAE
• Projected ultimate loss & ALAE adjusted to current exposure and dollar levels with expected ultimate loss & ALAE based upon the current exposure and dollar levels
5. If basis of experience rating formula is projected ult losses at current exposure & dollar levels, what do we have to adjust for?
• 1. Economic & social inflation
• 2. Changes in risk characteristics
• 3. Changes in policy limits
6. The expected component losses estimate what and
• Estimated as a product of exp loss rate and exposure measure
• Can reflect prior/current period
7. Formula for computing GL ERP credit/debit
CD = (AER - EER) / EER x Z
8. Calculation of the Actual Experience Ratio (AER)
• 1. Company Subject B/L L&ALAE Costs
• = Curr B/L Prem * Exp LR * Detrend
• *
• 2. Calculate Reported Losses and ALAE Limited by Basic Limits and MSL
• *
• 3. Add Expected Unreported Losses and ALAE Limited by Basic Limits and MSL
• = Comp Subj B/L Loss&ALEAE (1) * EER * %Unrpt
• *
• 4. AER = (2 + 3) / (1)
9. NCCI Formula with substitutions for primary and excess credibility
• Mp = (Ap + w x Ae + (1 - w) x Ee + B) / (E + B)
• Ap = Actual Primary Losses
• Ae = Actual Excess Losses
• Ep = Expected Primary Losses
• Ee = Expected Excess Losses
• B = Ballast Value [stabilizing value based on Zp = E / (E+B)]
• w = Excess Losses Weighting Factor = Ze / Zp
10. What is the D-ratio?
Loss elimination ratio at primary loss limit
11. Schedule Rating
• 1. Does not directly reflect claim experience
• 2. Recognizes characteristics expected to have material effect on experience that are not actually reflected in experience
• Changes in exposure
• Changes in risk control programs
• Used when risk too small to qualify for experience or composite rating
• 3. May be based on objective criteria or subjective underwriting judgment
• 4. Avoids double-counting the effect of risk characteristic in both experience and schedule mod
• **e.g. newly implemented safety program improves experience over yrs
12. Composite Rating
• 1. Large, complex risks use a single, composite, exposure base instead of several for many di fferent coverages
• 2. Composite rate determined at the beginning of the policy period using historical exposures
• May be determined using manual rates with experience and/or schedule mods
• Depending on size, may be based solely on insured's own experience (a.k.a. Loss Rated)
• 3. After expiration, audited to determine composite exposures
13. Pricing considerations of large deductible policies
• Claims Handling: Insurer may handle all claims, even if below deductible
• Application of Deductible: May apply only to losses or losses & ALAE
• Deductible Processing: Insurer may pay cost of entire claim and then seek reimbursement from company for amounts below deductible
• Risk Margin: Loss above large ded are more uncertain, & profit may need adjustment
14. Formula to calculate premium of Large Deductible Policy
• CR = Credit Risk
• RM = Risk Margin
• P = (L + ALAE + Ef + CR + RM) / (1 - V - Q)
15. Basic Retrospective Rating Formula
Retro Rating = (Basic Prem + Coverted Losses) x Tax Multiplier
• = (Expense Allowance - Expense Prov by LCF + Net Ins Charge) x Std Prem
• Intended to provide for:
• Insurer's target u/w profit and expenses excluding expenses provided for by LCF and tax multiplier
• Net charge for limiting the retro premium between minimum and maximum
• Cost of limiting each occurrence, if applicable
17. Converted losses =
Rpt Loss * LCF
• Insurance premium for risk before consideration of retro plan and any premium discount
• Determined on basis of exposure, insurer's rates, experience mod, and any premium charges excluding premium discount
• SP = Manual Prem * (1 +/- Experience Modification)
19. Insurance Charge and Insurance Savings
• Insurance Charge is an estimate of cost to insurer associated with retro max
• Insurance savings is an estimate of savings to insurer for requiring a min premium
20. Company Subject Loss & ALAE Cost =
SP * Experience L & ALAE ratio

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 Author: jenielwu ID: 135420 Filename: - TIA EXAM 5 - WERNER CH 15.txt Updated: 2012-02-15 04:22:40 Tags: tia Folders: Description: exam 5a Show Answers:

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