Topic 5 Ratemaking
Card Set Information
Topic 5 Ratemaking
Topic 5 Flashcards
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?
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
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
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?
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