Assuming that losses increase over time with inflation, should the split point increase, decrease,
or stay the same? Explain.
As claim sizes increase with inflation, with a constant split point, a larger proportion of losses will become excess of that split point. In order for the split plan to remain effective, the split point should increase over time, so the portion of losses split between primary and excess can
remain steady.
Formula for Manual Prem (Subject Prem)
Manual Prem=sum of (3-yr payroll/100 * Manual Rate)
Exp Rating Plan eligibility
For each insured to qualify for experience rating, they must meet either 1 of 2 criteria:
i. Total of last 2 years of exp period manual premium >= Rule 2.A.2. Column A amount.
ii. Average exp period manual premium >= Rule 2.A.2. Column B amount.
Include a discussion on how a single split plan considers frequency and severity and the relative importance of each.
A_primary reflects the freq component of losses
A_xs reflects the sev component of losses
Using the NCCI methods as a model, propose two procedures to add stability to terrorism insurance ratemaking.
And For each procedure, provide one argument against including it in terrorism insurance ratemaking.
Limit individual claims/accidents
Work Comp experience rating and terrorism ratemaking have different goals.
Split losses into primary and excess components
Since terrorism losses are rare and large in magnitude, the primary portion may not have much meaning, as almost all of the losses will be in the excess portion.
Credibility-weight actual and expected loss experience
It would be difficult to determine how much credibility would be appropriate to give actual terrorism loss experience, given that terrorism events are so infrequent and volatile.
Give more credibility to larger risk experience
Larger risks are only more stable when they have more expected claim counts compared to smaller risks. But terrorism losses are rare and catastrophic in nature.
An account had large losses last year and now has a debit modification. The underwriter wants to renew this account since the debit mod will help recoup losses. Evaluate the underwriter’s reasoning to renew the account.
The debit mod attempts to get the premium accurate for the prospective period based on future expected loss (which is predicted based on historical losses), rather than serving as a penalty for past losses. As such, renewing the account is no guarantee that there will be extra profit in the
next policy term.
Explain the assumptions behind the theory that B and K should be constant for all risk sizes. – not in syllabus anymore
If B and K are constant, the volatility of losses should decrease proportionally to the increase in risk size, leading to a lot more credibility in large risks than small risks.
*** s.t. var falls quickly for big stable risks and they get more cred; var falls slowly for small risks and they get less cred;
z=E/(E+K) from Fisher Exp s.t. from NCCI too…
Critique the theory that B and K should be constant for all risk sizes. – not in syllabus anymore
empirical data has shown the reduction is not proportionally
Fully explain a valid method that can be used to assess the performance of the proposed plan as compared to the current NCCI plan.
Quintile test:
for each plan, group by risk size
for each risk size, sort by increasing mod
group into 5 buckets
calculate standard LR & manual LR for each bucket
the best plan has standard LR being similar with no trend & manual LR universally increasing with large spread
Assess the impact of implementing the newly proposed experience rating plan with constant B&K in a competitive market.
since B&K stays constant, more cred given to large risk;
small risks with credit mod & large risks with debit mod will be preferred business ;
supply and demand will drag the rates back to balance
Is ALAE included in Ap, Axs?
No
