Chapter 10 Automobile Insurance Ratemaking key point review questions

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Chapter 10 Automobile Insurance Ratemaking key point review questions
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Chapter 10 Automobile Insurance Ratemaking key point review questions
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Chapter 10 Automobile Insurance Ratemaking key point review questions
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  1. 1) In Manitoba, what is the difference between the mandate of MPI for Autopac, and Autopac extension and SRE?
    • In Manitoba, the mandate of MPI is break even on basic and optional Autopac policies.
    • The income must be sufficient to:

    - Pay claims;

    - Cover administration costs;

    - Cover acquisition expenses, including agents’ commissions; and

    - Maintain sufficient funds for year-to-year claims stabilization. The mandate of Special Risk Extension (SRE) is to produce a profit.
  2. 2) Name the major classes of automobile risks.
    a) Private passenger (pleasure and business use)

    b) Commercial vehicles( trucks and delivery autos)

    c) Public automobiles (buses and taxicabs)

    d) Recreational vehicles (motorcycles, snowmobiles, ATVs)

    e) Garage risks(road hazard and dealership risks) f) Non-owned automobiles
  3. 3) What are the 4 aspects of each automobile risk that must be considered in rating? How does each one affect the rate?
    a) Territory where the automobile is used

    b) Class of automobile and its uses

    c) Drivers

    d) The automobile itself
  4. 4) What makes an insurance rate different from the price of another commodity?
  5. 5) How does MPI differ from private insurers in the use of rating factors relating to drivers?
    In the private insurance age is a factor in rating in some jurisdictions, and young drivers pay more, while experienced drivers and senior citizens pay less. In addition young women may be charged lower premiums than young men because statistics show they have fewer and/or less severe accidents.

    MPI does not discriminate on the basis of age or sex. Only the experience and driving record affect premiums.
  6. 6) What are the components of a premium?
    a) Pure Premium – this is the amount required to pay only the anticipated losses

    b) Expense loading – this is added to the pure premium and includes the following

    a. Acquisition costs – commission and cost of the insurer’s sales structure

    b. Processing and servicing costs – administration

    c. Taxes – federal, provincial, and municipald. Contingencies –catastrophes,extra large losses, and reinsurance costs

    e. Profit
  7. 7) Where does the data used in automobile ratemaking come from and how is it collected?
    All private automobile insurers who write business in Canada must record and file automobile experience data to comply with the requirements of the Automobile Statistical Plans prescribed by the provincial Superintendents of Insurance. The information is used to provide industry-wide statistics for analysis by regulators and ratemakers. This work is undertaken by the Insurance Bureau of Canada(IBC) and the cost is shared among the insurers, except in provinces where basic automobile insurance is provided by the government.
  8. 8) What is the difference between data based on a policy year and that based on an accident year?
    a) Policy year

    The experience of all policies with policy effective dates within the year is grouped together. All claims arising from these policies are taken into account regardless of when the happen, late reported claims included, so that premiums are matched with losses. This information gives the actuary a starting point from which to project future loss costs and to develop premiums. This basis was widely used in ratemaking for many years, but its weakness is that it does not utilize the most up-to-date data used to discern current loss cost trends.

    b) Accident year

    All losses in a given year are captured regardless of the policy years to which they are attributable. The loss costs so demonstrated are the most recent indicators of what future loss costs may be.

    Ex: a policy is sold with an effective date of December 1, 2010, with a claim occurring in January of 2011. In this case, the claim is reported as a 2011 claim for actuarial purposes since the claim happened in 2011
  9. 9) What are the components of loss costs?
    a) Paid losses – known amounts;


    b) Outstanding losses – provision for reported, but not yet paid claims, which are usually referred to as estimates in claim files; and

    c) Incurred but not reported losses (IBNR) – liability for future payments on losses that have occurred but have not yet been reported to the insurer.
  10. 10) What are the IBNR losses?
  11. 11) What is trending?
    Trending: the actuary must forecast the trend of increase or decrease in loss costs for the period for which premiums are calculated.

    Ex: if collision loss costs are increasing 0.5% per month, the actuary forecasts a trend of an increase of 6% annually. This rate of increase is applied to the loss costs, usually to the mid-point of the rate program being calculated.
  12. 12) How can different types of automobiles affect the different coverages under a policy?
    The value assigned is based on a number of factors including body style, horsepower, costs of repairs, frequency and costs of actual claims, and vehicle price. The higher the expected claims costs are, the higher the rate group will be, and thus, the higher the insurance premium charged will be.
  13. 13) How does investment income affect automobile rates?
    The insurer’s use of investment income – the money earned from premiums and on loss reserves – to modify premiums has been subject to close scrutiny. Regulators and politicians have been interested in the overall return on equity (the capital invested) when determining permitted rate levels. The actuary’s task, therefore, is further complicated, and the insurer’s chief financial officers must assist.
  14. 14) How is the Earned Loss Ratio determined?
    Earned Loss Ratio (loss costs): is expressed by coverage per vehicle insured for all provinces, territories, years, classes, and coverages.
  15. 15) What different types of control exist on automobile rates?
    a) Prior Approval – companies file their proposed rates and must wait for approval before using them

    b) File and use – companies file proposed rates and use them as proposed, but may face enquires by the board( used in British Columbia)

    c) File and use following a “deemer”period – companies file their proposed rates and the law allows a period of time, such as 30 or 60 days, during which the board can challenge them. Following this period, the company can use the unchallenged rates as they are then deemed to be approved.

    d) Prior setting of rates by the board with variations from “benchmark” – the board sets the rates and these are known as the benchmark. Insurers can use the benchmark rates or vary them, based on a board-approved percentage. If an insurer wishes to deviate up or down from the benchmark, or vary the classes or other rating factors, a board hearing is usually required – this may take the form of a public hearing. The board then allows, disallows, or varies the application.
  16. 16) What is the Green Book?
    The Green Book shows the Actual Loss Ratio Exhibit, which is a ratio of the loss costs to the earned premiums(this is known as the Earned Loss Ratio), and Pure Premium Exhibits.
  17. 17) What is VICC and what is its function?
    VICC (Vehicle Information Center of Canada): records data to calculate rate groups under the CLEAR system.

    - Collects data on the cost of claims relative to such factors as wheelbase, body style, weight-to-horsepower ratio, price, and the theft record of individual models. This is why a lower-priced vehicle is not always cheaper to insure.
  18. 18) From what 2 sources does MPI collect premiums?

    a) Automobile insurance premiums

    b) Driver’s license premiums
  19. 19) What 5 factors used to determine Autopac premiums?
    a) Territory – the area of the province in which the insured lives

    b) Use – of the vehicle

    c) Vehicle – year, make, and model

    d) Driving record – of the owner

    e) Commuting – to Winnipeg for work or school
  20. 20) What is CLEAR and what is its purpose?
  21. 21) What are rate groups and how do they affect the premium charged to insure a vehicle?
    Rate Group: is a numerical value assigned to a vehicle based on its expected claims costs.

    - The value assigned is based on a number of factors including body style, horsepower, costs of repairs, frequency and costs of actual claims, and vehicle price.
  22. 22) Explain how Driver Safety Rating (DSR) affects vehicle and driver’s license premiums.
    Drivers are assigned a DSR level, which is their position on a scale with 32 active levels. The level they are assigned depends on their driving record over the past and years, and will affect how much they pay for their Autopac and driver’s license premiums.


    Driving safely means more merits and moving up the scale, which usually results in lower premiums. The scale is divided into a positive side and negative side. If divers are in the positive side, each year of safe driving moves them one level up the scale. If drivers are on the negative side (I.e. have a history of high-risk driving) one year of safe driving can raise their DSR substantially.

    Ex: a driver with 20 demerits who has an active license, moves up the DSR by 7 levels for one year of safe driving.

    Higher-risk driving means fewer merits (or more demerits) and moving down the scale along with higher premiums in the most cases.

    MPI will send drivers a notice each year showing where they sit on the DSR scale, and what they will owe for their driver’s license and vehicle premiums for the next year.
  23. 23) What might cause a driver to move up or down on the DSR scale?
    Higher-risk driving means fewer merits (or more demerits) and moving down the scale along with higher premiums in the most cases.
  24. 24) What are examples of traffic convictions that cause a driver to move far down the DSR scale? What convictions cause a driver to move down less?
    Traffic convictions also affect DSR. Drivers who receive more serious convictions will move farther down the scale than drivers who receive less serious convictions.

    Ex: not obeying a traffic sign: 2 levels down the scale

    Impaired driving: 10 levels down the scale

    Speeding more than 49 km over the limit: 10 levels down the scale

    Impaired driving causing death: 15 levels down the scale

    Leaving the scene of an accident: 10 levels down the scale
  25. 25) What function does the Public Utilities Board have with respect to Autopac rates?
    It is important to understand that all premiums relating to basic Autopac must be approved by the Public Utilities Board. Extensive public hearings, at which any person or organization may participate, are held before rates are approved, denied, or modified.

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