Ludwig

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Author:
Esaie
ID:
26175
Filename:
Ludwig
Updated:
2010-07-09 16:08:13
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Exam6
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  1. Salzmann Procedure to Price Reinsurance
    • 1. Calculate retention as a percent of Coverage A limits
    • 2. Calculate retention + limit as a percent of Coverage A limits
    • 3. Lookup up values in Cumulative Loss Cost Distribution table
    • 4. Take diff erence of values in step 3 to get Exposure Factor
    • 5. Exposure Premium = Exposure * Direct Premium
  2. Ludwig's Proposed Rating Methodology
    • 1. Calculate weights for each cause of loss from historical data
    • 2. Calculate the exposure rate for fi re, wind, and all other
    • 3. Calculate total exposure rate using steps 1 and 2
  3. Advantage of Ludwig's Methodology over Salzmann Tables
    • 1. Explicitly recognizes that all causes of loss need to be considered
    • 2. Recognizes that each cause of loss has its own unique loss distribution
    • 3. By considering all HO property coverages, revised tables directly applicable to rating property excess of loss
  4. Problems with Exposure Rating Commercial Property
    • 1. Multiple locations
    • 2. Coverages provided are not standard across all commercial property policies
    • 3. No direct relationship between building limit and contents
    • 4. Not a homogeneous set of exposures like homeowners
    • 5. Range of insured values much greater than homeowners
  5. Improvements Made By Ludwig
    • 1. Provides up to date size-of-loss distributions
    • 2. Considers damages besides property losses
    • 3. Considers perils in addition to fi re
    • 4. Constructs size-of-loss distributions for commercial property risks
  6. 3 Difficulties in Pricing Excess of Loss Reinsurance Treaties
    • 1. Unexpected asbestos and pollution claims
    • 2. Low loss frequency in high layers
    • 3. Reinsurer may not know mix of property business written by the primary carrier
  7. 3 Techniques to Price Excess of Loss Reinsurance Treaties
    • 1. Experience Rating
    • 2. Using expected loss distributions (curve fitting)
    • 3. Exposure rating
  8. 3 Problems with Experience Rating to Price Excess of Loss Reinsurance
    • 1. Credibility: little historical experience for high reinsurance layers
    • 2. Information: historical losses needed below present retention if trended value would exceed retention
    • 3. Changes in Mix of Business: experience rating presumes that hazards have not changed signi ficantly
  9. 2 Problems with Using Expected Loss Distributions to Price Excess of Loss Reinsurance Treaties
    • 1. Subjectivity - selecting curve that models loss process
    • 2. Complexity - explaining rate derivation to underwriter is complex
  10. Variables A ffecting Exposure Rating Procedures
    • 1. Size of risk
    • 2. Deductibles
    • 3. Peril
    • 4. Jurisdiction
    • 5. Information
  11. 8 Principles of Exposure Rating
    • 1. Size-of-loss distributions for homogeneous HO book can be stated in terms of % of insured values
    • 2. Less homogeneity among risks produces greater diff erences in loss distributions stated in %'s
    • 3. Higher deductibles decrease subject premium and increase excess rates
    • 4. Relative rates by peril for per-risk XOL and catastrophe XOL are different
    • 5. Claim frequency greatly aff ects primary rates
    • 6. Reinsurers rarely have all information needed for ideal exposure rating
    • 7. Amount of insurance not limit for size of claim - need to include contents, loss of use
    • 8. For small commercial property risks, rst-loss scales vary by classi fication and occupancy

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