Teng & Perkins

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Author:
Esaie
ID:
34005
Filename:
Teng & Perkins
Updated:
2010-09-11 08:45:46
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Exam6 by Esaie
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Exam6 by Esaie Teng & Perkins
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  1. Premium Asset
    • Premium that the insr expects to collect based on the expected ult loss experience less the premium that the insr has already booked
    • Commonly referred to as Earned But Not Rpt P (EBNR)
    • Appears on a balance sheet as the "Asset for Accrued Retro P"
  2. Reasons for popularity or retro rated policies
    • Returns P to insd for good loss experience (attracts good customers)
    • Cash flow feature - insd can hold to cash longer
    • Cost of ins much harder to predict today than in the past (inflation, regulation, ...)
  3. PDLD Ratio
    • Ratio of premium development to loss development
    • PDLD ratio is applied to expected future loss dvpmt to calculated expected future premium dvpmt
  4. Formula approach to calculating PDLD ratios
    • First adjustment period
    • Pn = [BP + (CLn * LCF)] * TM / L1
    • where L1 = SP * ELR * %Rpt1
    • SP = standard premium
    • BP = basic premium
    • LCF = loss conversion factor
    • TM = tax multiplier
    • CL = capped losses
    • Second adjustment period
    • (P2 - P1)/(L2 - L1) = (CL2 - CL1) / (L2 - L1) * LCF * TM
  5. Empirical approach to calculating PDLD ratios
    • Selected PDLD * % Rpt loss = PDLD * Loss Emg
    • (Upward cum PDLD * % Rpt) / (Upward cum % Rpt) = CPDLD ratio
    • Premium Asset = (Exp fut P + P booked from prior adj) - (P booked as of ...)
    • Note: PDLD usually > 1 in first retro adjustment because
    • basic premium is included in the first retro computation
    • only a small portion of the loss is limited
    • LCF and TM results in more than $1 of premium per $1 loss
  6. PDLD Procedure: Adv and Disadv
    • + modeled directly on retro formula, so easily explained
    • + emphasis on premium sensitivity
    • + useful when chgs in retro rating plan parameters
    • - defn of loss may include ALAE
    • - chgs in mix of business
    • - collectibility of premium

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