Teng & Perkins

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Esaie
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26421
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Teng & Perkins
Updated:
2010-07-12 09:25:42
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Exam6
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  1. 3 Reasons For Increased Popularity of Retro Rated Policies
    • 1. Policy returns premium to the insured for good loss experience
    • 2. Cash flow advantages since premiums are paid as losses are reported or paid
    • 3. Cost of insurance is harder to predict than in the past
  2. 2 Methods of Calculating PDLD Ratios
    • 1. Empirical Approach: use historical premium and loss development data
    • 2. Formula Approach: use retro rating plan parameters
  3. Retro Premium Formula
    • Pn = [BP + (CLn * LCF)] * TM where
    • 1. Pn = Premium at nth retro adjustment
    • 2. BP = Basic Premium
    • 3. LCF = Loss Conversion Factor
    • 4. TM = Tax Multiplier
  4. PDLD Ratio for 1st Retro Adjustment
    • 1. P1 / L1 = [BP + (CL1 * LCF)] * TM / L1 or
    • 2. P1 / L1 = [(BP / L1) * TM] + [(CL1 / L1) * LCF * TM]
    • 3. Or Approximately,
    • [(BP * TM) / (SP * ELR * %Loss1)] = [(CL1 / L1) * LCF * TM]
  5. PDLD Ratio for 2nd Retro Adjustment
    • PDLD2 =
    • 1. = (P2 - P1) / (L2 - L1)
    • 2. = [(CL2 - CL1) / (L2 - L1)] * LCF * TM
  6. Loss Capping Ratio
    • 1. Defi nition: ratio of capped losses to uncapped losses
    • 2. Formula 1: CL1 / L1
    • 3. Formula 2: LR * (1 - χ - LER), where
    • a) LR = uncapped loss ratio and
    • b) χ = Table M charge at max - Table M charge at min
    • 4. Usually decreases as the data becomes more mature
  7. Reasons Slope is Not 1 in Fitzgibbon's Method
    • 1. Some losses exceed loss limit, reducing slope
    • 2. In some plans, minimum premium exceeds basic premium
    • 3. A loss conversion factor (LCF) and a tax multiplier (TM) are applied to the incurred losses in the retro rating formula, thereby changing the slope of the line segment
  8. Teng & Perkins Assumptions
    • 1. The premium responsiveness during subsequent adjustments is independent of the premium responsiveness during previous adjustments
    • 2. The slope of the line segment depends on the time period, not on the beginning loss ratio or the beginning retro premium ratios
  9. 3 Advantages of the PDLD Method (Feldblum)
    • 1. Modeled directly on retro formula, so it is easily explained
    • 2. Emphasis on the premiums sensitivity in the retro rating formula parallels the RBC loss sensitive contract o ffset in the underwriting risk charges and Part 7 of Schedule P
    • 3. May prove useful when changes in the retro rating plan parameters distort the indications of other methods
  10. Reasons For a Change in The Slopes of Line Segments
    • 1. Change in the average basic premium ratio (i.e., Change in the y-intercept)
    • 2. Change in premium responsiveness (i.e., Change in the slope)
    • 3. Change in the length of the loss reporting pattern (i.e., Change in the length of the line segment)
  11. Advantage/Disadvantage of Using Retro Formula to Estimate PDLD Ratio
    • 1. Advantage: Responds to changes in retro rating parameters that are sold, whereas the PDLD ratios derived from the historic data may not be indicative of the future PDLD ratios
    • 2. Disadvantage: Possible source of bias is the use of average parameters for the LCF, TM, max, min, and per accident limitation
  12. 2 Facets of Underwriting Risk
    • 1. Written Premium Risk: risk that future premiums will prove inadequate to cover the future losses and expenses
    • 2. Reserving Risk: risk that the reserves held for accidents that have already occurred may prove inadequate
  13. 3 Reasons PDLD1 Usually Greater Than Unity
    • 1. Basic premium is included in the fi rst retro premium computation
    • 2. Only a small portion of loss is limited by the retro max and per accident limit at this maturity
    • 3. Application of the loss conversion factor and tax multiplier results in more than a dollar of premium per dollar of loss

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