M80 - Underwriting Practice > C6 - Pricing > Flashcards

C6 - Pricing Flashcards

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1
Q

What are the 4 elements to a premium

A
  1. Risk Premium
  2. Expenses
  3. Profit
  4. Return on capital employed (ROCE)
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2
Q

What is the risk premium

A

The expected ultimate cost in claims of the risk being accepted, including an allowance for the degree of uncertainty

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3
Q

What does risk premium have to additionally account for

A

As it is the money required to pay future claim, it needs to account the time value of money (especially for personal injury or liability claims)

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4
Q

What are the 7 main things an underwriter will consider when setting a risk premium

A
  1. Subject matter
  2. Exposure/size
  3. Scope of cover
  4. Rating factors
  5. Historical claims experience
  6. Large and catastrophic claims
  7. The future
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5
Q

What is another way of saying debit

A

Loading

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6
Q

What are the 3 most common forms of gathering information for an underwriter

A
  1. Proposal form/underwriting presentation
  2. Risk surveys
  3. Verbal advice
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7
Q

What should underwriters build into their pricing structure to account for catastrophe claims

A

A catastrophe fund

This is set aside as reserves, out of which these types of losses will be paid

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8
Q

What is the most effective way of protecting against catastrophe claims

A

Reinsurance

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9
Q

What are the 6 future risks that underwriters may need to consider when calculating risk premium

A
  1. Inflation
  2. Legislation changes
  3. Climate change
  4. Crime rates and trends
  5. State of the economy
  6. Emerging risks
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10
Q

How does the Society of Lloyd’s define ‘emerging risks’

A

“An issue that is perceived to be potentially significant, but which may not be fully understood or allowed for in insurance terms and conditions, pricing, reserving or capital setting.”

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11
Q

What are the 2 elements of expenses

A
  1. Fixed
    (e.g. building occupation, staff, head office, IT, etc.)
  2. Variable
    Those that depend on the nature of the risk
    (e.g. surveys, site visits, actuarial processing, etc.)
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12
Q

What type of expense is claims handling

A

Typically, a fixed cost based on the NUMBER of claims as opposed to size

But can vary if specialist advice or legal actions were required

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13
Q

What type of reinsurance arrangement is fixed and what type is variable

A

Fixed = Treaty
Variable = Facultative

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14
Q

What is an important aspect of the expenses that may need to be considered by the underwriters depending on the type of business

A

Taxes and levies

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15
Q

What are 3 examples of taxes and levies

A
  1. Motor Insurers’ Bureau (MIB) - A levy charged to motor insurers to compensate victims of uninsured/untraced motorists
  2. Financial Services Compensation Scheme (FSCS) - A levy charged to compensate consumers if authorised firms are unable to pay claims
  3. Insurance Premium Tax (IPT) - A sales tax on insurance at a lower standard rate of 12% and a higher rate of 20%
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16
Q

What type of expense are taxes and levies classed as

A

Typically, a variable expense as the insurer has no influence over the amount charged by a government

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17
Q

Who is responsible for the collection and payment of IPT

A

The insurer to HMRC

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18
Q

What are the 4 common expenses for any insurance risk

A
  1. Claims handling cost - fixed (unless specialists are involved)
  2. Reinsurance cost - fixed (unless facultative reinsurance)
  3. Taxes and levies - variable
  4. Intermediary remuneration - variable
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19
Q

Why is the loss ratio important to ROCE

A

It is the measure of profit, which produces a dividend to shareholders and other capital providers

A poor loss ratio may cause existing capital to be used rather than added to

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20
Q

Why might an underwriter be forced to accept an underwriting loss

A

Through market competition

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21
Q

How can an insurer be profitable even with an underwriting loss

A

If their investment returns are greater than the loss on the underwriting

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22
Q

What type of expense is return on risk capital

A

Semi-fixed as the insurer must meet the expense if they are to retain the capital

It is up to strategy to determine whether the return is met by underwriting and/or investment

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23
Q

How is the premium for high-volume risks calculated

A

A predetermined pricing structure derived from statistical analysis of certain rating factors, with expenses and profit built into the rate

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24
Q

How is the premium for lower volume risks (but not the most complex) calculated

A

A more bespoke rating where underwriters may use predetermined rates but will modify to reflect the claims experience and other features of the particular risks

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25
What is a 'walk-away price' also referred to as
A minimum premium An insurer will set an applicable min premium for each class of business
26
What is an adjustable premium
Where the size or nature of a risk can only be determined at the end of a policy. In these cases, an estimate is made at inception which is then adjusted at expiry when the policyholder declares the actual values
27
What would be 2 examples of classes that uses adjustable premiums
1. Employers' Liability for wage rolls 2. Property for stock values
28
What is a non 'cost-based' pricing element to a premium
The market If their competitors are winning and retaining their business, then the current calculations will have to be deviated from
29
1. What method of rating is based on the claims it has actually generated 2. What type of risks is this more commonly used on
1. Burning costs 2. Medium to large risks (works better on large risks)
30
What is the calculation for burning costs
Burning cost = Total Claims Cost / Measure of Exposure
31
1. Where it is not possible to have one measure of exposure, how can the burning cost be calculated 2. What type of claims is this more appropriate for
1. Burning cost = Total Claims Cost / Premium 2. High frequency, narrow distribution
32
What are 4 ways in which the burning cost method is attractive to a proposer
1. Very transparent 2. Easy to understand 3. Gives incentive to manage their risk carefully 4. Others' claims records do not influence their own premium
33
What are 6 drawbacks of the burning cost method
1.Ultimate value of claims may not be reflected 2. Claims/general inflation not accounted for 3. Large claims will mean that customers premium becomes unaffordable for a long time 4. Alterations in the risk and/or cover is not accounted for 5. No trends in the claims are accounted for 6. Future claims may differ from historic claims
34
How can underwriters attempt to calculate the ultimate value of claims for open accounts
Claims triangulations
35
- What is type of analysis can be done to improve the burning cost method - What are the 6 ways they can do this
- Prospective risk analysis 1. Project ultimate net loss for each underwriting year 2. Re-evaluate historic claims to current-day values 3. Factor in potential for large losses 4. Adjust claims experience for changes in coverage and risk 5. Analyse trends in the data to forecast future losses 6. Make allowance for emerging and future risks
36
What must an underwriter consider before they can rely on claims data
The credibility
37
What are 4 aspects that make a claims dataset credible
1. Large sample of homogenous risks (i.e. similar features) 2. Classification coding's have been accurately allocated by claims-handlers 3. Claim estimates have been reviewed and closed as soon as settled 4. A good historical picture of the risk (typically 3-5 years for short tail and 7-10+ for long tail)
38
When would a more detailed analysis of claims data be required
When the data is from an external party As the definitions may not reflect a market standard
39
What is the limitation factor when segmenting raw data
The coding applied to the data
40
What are the 3 main things an underwriter looks for when analysing claims data
1. Frequency 2. Severity 3. Trends
41
What is the loss ratio formula
Incurred / Earned Premium Incurred = both paid and outstanding claims
42
What are 5 other factors underwriters will consider w.r.t claims data
1. Inflation rates - underwriters should apply 'inflationary factors' to level historical costs to today's level 2. Exchange rates - if paid across borders 3. Changes in cover or limits - data can be 'recast' so data is on a comparable basis 4. Risk management - Changes in risk management (i.e. new water shut off valves were not previously used) 5. Reserving - Changes in reserving philosophy will have to be examined
43
What type of claims costs typically outstrip general inflation and why
Bodily injury (at 9.5% per year between 1996-2006 and +10% since) This was due to changes in legislation affecting periodic payments and time for settlement
44
What 2 things are claims triangles used for
1. Forecast claims experience of a risk based on its past experience 2. Compare data at a specific point in time to determine whether improving or deteriorating
45
What else can be used to help develop claims experience
Statistical computer models
46
What classes of business is triangulations particularly useful for
Where the claims experience takes several years to mature
47
Where can triangulations be affected
Where accounts have been affected by a catastrophe loss
48
Who can often help underwriters forecast losses and analyse data
Actuaries
49
What are 3 reasons why claims notifications occur late
1. The incident was expected to fall within an excess, later on it transpires that it will be more costly 2. The extent of an injury sustained is not apparent at the time 3. The long and complicated reporting procedure in place caused severe delays in the notification reaching the insurer
50
What type of classes are an exception to the usual IBNR processes
Classes written on a claims made basis e.g. Prof indemnity
51
What does IBNER stand for
Incurred but not enough reserved Essentially under reserved claims
52
What helps with predicting IBNR and IBNER exposures
Actuarial models (if there's large amounts of data) Triangulations if this is not available
53
On what 6 topics should liaison between claims and underwriting functions occur
1. Policy wordings 2. Emerging trends 3. Recording data 4. Fraud 5. Backlogs 6. Individual claims
54
What is an important aspect of the claims role that has an impact on underwriter analysis
Allocation of coding to new claims records
55
When might an individual claims be an important topic of discussion for underwriters
When the risk is coming up for renewal
56
What are 2 reasons why a backlog in the claims department is an important topic for underwriters to consider
1. As loss ratio data may be distorted 2. As it may impact client relationships with key brokers
57
Why might fraud be an important area for underwriting and claims to liaison over
As any weaknesses in sales and underwriting can be addressed quickly
58
What forum is good for UWs and claims handlers to collaborate
Review meetings
59
What is the basic role of an actuary
To try predict uncertain future financial events
60
What 6 things will actuaries typically consider when developing their forecasting models
1. Historic claims experience 2. Risk environment 3. Economic and financial conditions 4. How businesses operate 5. Policyholder behaviour 6. Impact of legislation
61
On what 4 occasions will an underwriter call upon an actuary
1. Rating 2. Individual risk analysis 3. Claim reserving and IBNR 4. Return on capital employed (ROCE)
62
What are 5 additional roles of an actuary outside of the underwriting process
1. Calculating technical provisions 2. Signing off on models and methodologies used 3. Assessing the sufficiency and quality of data used 4. Expressing an opinion on the overall underwriting policy 5. Expressing an opinion on the adequacy of reinsurance arrangements
63
What are 3 corporate/underwriting strategies in response to a softening market
1. Pull out of the market - viewed as a last resort 2. Maintain current strategy - As long as the loss of business does not exceed expenses 3. Lower prices to compete - As long as expense ratios do not become unacceptable
64
What are insurers keen to do when underwriting in a softening market
Prudent risk selection
65
Other than price, what are 5 other things that affect the purchase of insurance
1. Brand 2. Security Rating 3. Quality of service 4. Speed and generosity when handling claims 5. Value added services, such as helplines
66
What should underwriters know when they are deciding underwriting strategy
Where they are in an insurance cycle
67
How can insurers gain insights on their competitors
Through competitive analysis tools Obtaining policy booklets to compare offerings Use of big data to target marketing strategies
68
What market research tool is used to rate policy offerings
Defaqto - uses a star system
69
What are 3 pools of information that underwriters can use in addition to the proposal
1. Risk surveys 2. Data exchanges 3. Nat cat mapping
70
What are 2 reasons why insurers are less inclined to share data post 1980s
1. Commercial reasons 2. Competition Act 1998 - which prohibits anti-competitive behaviour
71
What are 3 data exchanges that insurers can use
1. The Claims and Underwriting Exchange (CUE) Aims to prevent claims fraud by holding all household and motor incidents reported arising from injury or illness. Some insurers integrate CUE into their acceptance processes. 2. UK Bodily Injury Awards Study The International Underwriting Associated of London (IUA) collected data from insurers on bodily injury awards. The report details claim's inflation, trends in injury claims and the cost of legal rulings 3. Thatcham Research A motor insurers' research centre which provides insights on car security, crash testing and passenger/pedestrian safety. It provides some 70% of data that insurers use to define car groupings
72
What is ClimateWise
A group under the University of Cambridge which supports the insurance industry in better communication, disclosure and response to climate change risks
73
How much does the UK Environment Agency (EA) expect flooding to increase by in the next century
10x
74
1. Who provides information on the risk of flooding in England and Wales 2. Who provides information on the risk of flooding in Northern Ireland 3. Who provides information on the risk of flooding in Scotland
1. Environment Agency (EA) 2. Preliminary Flood Risk Assessment for NI (PFRA) 3. The Scottish Environment Protection Agency (SEPA)
75
What do insurers use to measure Earthquake risk
Government operated earthquake databases to track seismic activity
M80 - Underwriting Practice
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