Topic 5 Ratemaking
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What are the 5 characteristics of rates?
- Plan for Contingencies
- Promote Loss Control
- Keep It Simple
Why must a rate be stable?
- Changing rates are expensive
- Sudden changes upset customers
- Bad publicity and regulatory attention
What does is mean to be responsive in terms of ratemaking?
- Change promptly in response to external market forces
- *Can be in conflict with Stability
What does it mean to have a plan for contingencies in respect to ratemaking?
- Account for unexpected variations in losses and expenses
- Risk Charge (When confident P* is less)
What does it mean to promote loss control in respect to ratemaking?
- Adjust rates for policyholders that take preventive measures
- Charge higher rates for higher risks
What does it mean to keep it simple in respect to ratemaking?
- Producers and underwriters can utilize
- Policyholders can understand
Who can an actuary work for?
- Insurance Companies
- Regulatory Authorities
What do actuaries working for advisory organizations such as ISO supply?
Prospective Loss Costs
What are Prospective Loss Costs?
- Amount needed to pay future claims
- Also Known As Pure Premium (P*)
What is an expense provision?
- Amount needed to pay future expenses (premium taxes, overhead, etc.)
- Also Known As Loading
What are profit and contingencies?
- Where carrier accounts for the losses exceeding expectations and possible profit
- Also Known As Risk Charge
How do you estimate losses?
- Past losses is usually starting point
- Takes losses from past periods and adjust for future conditions
- Sometimes difficult because past history includes actual losses and loss reserves
- Loss reserves are estimates on costs for claims reported and not reported
What does IBNR mean?
- Incurred But Not Reported
- Not all claims are paid in the year premium is paid
- Not all are even reported the year the premium is paid
- Means that we are always making estimates
What are the three rate components?
- Prospective Loss costs
- Expense Provision
- Profit and contingencies
What are some other delays to rate function?
- Time required to analyze data and prepare a rate filing
- Waiting for state approval
- Time it takes to implement a new rate
- -Rates in effect for one year - time lag till you can implement a change
- Legislative or regulatory changes
- Hard vs. Soft Market
What are the ratemaking methods?
- Pure Premium Method
- Loss Ratio Method
- Judgment Method
- Ratemaking Data Development
- Policy Year Data Collection Method
- Calendar Year Collection Method
What are the steps for the Pure Premium Method?
- Calculate the pure premium
- Calculate expenses per unit
- Profit and Contingent Factor
What are the steps in Ratemaking Data Development?
- Collect data
- Adjust data
- Determine territory and class
- Prepare rate filing and submit to regulatory authorities
What are the steps in the Judgment Method?
- Underwriter sets rates based on experience or judgment
- Ocean Marine, Inland Marine, Aviation, and some Lloyd's vehicle
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