Card Set Information

2011-02-12 16:04:30

Show Answers:

  1. What is the Asset Share Pricing Model used for?
    • 1. Important when cash flows and premiums vary by year
    • 2. Life and health insurance price determination
    • 3. Examine profit of complete insurance contract from start to finish
  2. What are the differences Between Life and Casualty Ratemaking?
    1. Cancellation: P/C carrier has right to terminate the policy at renewal

    2. Claim costs: vary by duration in life/health (more so than P/C)

    3. Expenses: show similar pattern, one difference is 1st year commission for life is high, but low for renewals; for P/C independent agents commissions do not differ between years

    4. Level premiums common in life insurance; P/C rates maybe revised each yearF
  3. What developments or changes in P&C have motivated the use of Asset Share Pricing?
    1. Commissions: personal lines direct writers have higher 1st year commission rates

    2. Cancellations: Stable book of business with rare contract canclellation

    3. Loss costs: expected loss costs are greater for new business than renewal
  4. List 4 reasons why Asset Share Pricing Model isn't yet common in P&C insurance
    1. Data needed are not always available

    2. Casualty pricing techniques do not always take into account long-term pro fit considerations

    3. The casualty insurance policy allows great fexibility in premiums and bene fit levels

    4. Liability claim costs are uncertain, both in magnitude & timing
  5. What are two reasons that have contributed to the greater reliance of life actuaries on Asset Share Pricing methods?
    1. Level premiums for whole life policies

    2. Stability of life insurance benefits versus variability of casulaty insurance losses
  6. What is the FUNDAMENTAL issue in the asset share pricing model?
    The relationship of losses and expenses to persistency
  7. List 5 Reasons for the Relationship between the Duration of an Auto Policy and Claim Frequency for that Policy
    1. Experience: Good driving habits form over time

    2. Youth: young drivers usually have relatively new policies and higher than average claim frequencies

    3. Transience: Many high risk drivers have high termination rates

    4. Acquisition of vehicle: Insured isn't familar with the car

    5. D'Arcy four
  8. List 4 reasons why high risk drivers likely have higher termination rates
    1. Young males likely to cancel (move,marry,drop coverage)

    2. U/W more likely to cancel a young male driver than an adult

    3. Young males more likely to default on premium/can't afford it

    4.Usually have higher premiums and more incentive to shop around
  9. DArcy's Four Reasons for higher loss ratios on new business
    1. Inability to surcharge new insureds properly since less information is available

    2. Higher loss potential of insurance shoppers who switch around looking for bargain coverage

    3. New insureds include a high % of risks not wanted by other insurers

    4. New insureds may be unfamiliar with local driving conditions
  10. List 4 Reasons why P&C Expense Costs are Greater in Original Year
    1.U/W expenses incurred predominantly in the 1st year include salaries, cost of policy insurance, and u/w reports

    2.Loss control expenses incurred at or before policy issuance include technical inspections, landfill inspections, loss engineering services, financial analysis, and building inspections

    3.Acquisition expenses for direct writers are greater in the 1st year because of higher new business commission rates

    4. Most "other acquisition expenses" such as advertising, subsidies for new agents & development costs
  11. What is the relationship between duration and persistency?
    1. Many policyholders are undecided about the relative valueof the policy and required premiums; some may decide that insurance is not worthwhile

    2. insured may be dissatisfi ed with their carriers service

    3.Some may believe the premium is too high and continue shopping

    4. Some may be unable to aff ord insurance

    5. Carriers often reevaluate newly acquired risks with claims and cancel policy

    **But once a policyholder has kept the policy for several years, it is likely they will renew
  12. Termination Rate
    Number of terminations during a given renewal period divided by the sum of (terminations during that period plus policies persisting through that period)
  13. Probability of Termination
    Number of terminations during a given renewal period divided by the number of originally issued policies in that cohort
  14. List some Casualty Insurance Issues with the Discount Rates
    • 1. Settlement Lag
    • 2. Uncertainty of reserves (affected by inflation, court decisions, jury awards, social expectations)
    • 3. Records have incurred losses on an undiscounted basis
    • 4. P&C accounting doesn't match the U/W experience on a block of policies with the investment experience for the same block of policies
  15. Matching U/W Experience to Investment Experience is essential for Asset Share Pricing. List 3 Methods to Match Underwriting Experience with Investment Experience on Same Block of Policies
    • 1. Record undiscounted incurred claims, but include an off setting investment income account tied to the assets supporting the unpaid losses
    • 2. Record cash transactions
    • 3. Record discounted loss reserves
  16. List 3 profitability measures for Asset Share Pricing Model
    • 1. Return on Equity: model discounts future earnings at company's cost of capital & assumes surplus equals GAAP equity
    • 2. Break-even Equity: use a discount rate equal to the yield on securities of similar risk. Discount losses to same date as premium is collected & see if PY of total Profits is > 0.
    • 3. Internal Rate of Return: Show several columns of cash transactions (paid loss, investment income) and determine IRR
  17. Types of Information Needed to Determine Class Relativity Factors for Two Di fferent Types of Insured
    • 1.Relative average loss costs of these two groups of insureds (***)
    • 2. Relative average persistency rates of these two groups of insureds (***)
    • 3. Dimensions of the classi cation system
    • 4. Strength of loss ratio improvement by policy year for these insureds
  18. Policy Basis Versus Coverage Basis Rate Relativities
    • 1.Policy Basis model compares losses and expenses for all coverages combined among classes of insureds, and the resultant rate relativities must then be allocated to coverages
    • 2. Coverage Basis model compares losses and expenses for an individual coverage among classes of insureds
  19. Unlike traditional ratemaking procedures, asset share pricing uses persistency by what?
    Persistency rates by original classification instead of by current classification
  20. In the Classification Relativities Asset Share Pricing Model, what are the 3 differences by classification to form rate relativities?
    • 1. Average Loss Cost
    • 2. Average Fixed Expense
    • 3. Persistency Rates
  21. What are two considerations when you are seeking to change the insured book of business in your company?
    • 1. Any strategy may a ffect new business production or retention rates
    • 2. Premium rates and relativities aff ect consumer demand & the mix of insureds, thereby a ffecting insurer profi tability
  22. Name 3 considerations for pricing a retired driver discount
    • 1. Expected loss cost by policyholder age
    • 2. Persistency rates by policyholder age and policy duration
    • 3. Price elasticity of demand (effect of price on retention)
  23. Describe an example of the Optimal Pricing Strategy
    Underpricing insured in their 50s to gain market share among this desirable group, then reaping the profits when they age