Chapter 7: Actuarial Operations

Question 1

Actuarial Functions

Answer 1

• Ratemaking

- Estimation of unpaid liabilities and adequacy of loss reserves

Question 2

Ideal Characteristics of Rates

Answer 2

• Be stable
• Be responsive
• Provide for contingencies
• Promote risk control
• Reflect differences in risk exposure

Question 3

Rate Components

Answer 3

• An amount needed to pay for future claims and loss adjustment expenses (prospective loss costs)
• An amount needed to pay future expenses; such as acquisition expenses, overhead, and premium taxes (expense provision)
• An amount for profit and contingencies (profit and contingencies factor)

Question 4

Factors That Affect Ratemaking

Answer 4

• Estimation of losses
• Delays in data collection
• Change in the costs of claims
• Insurer’s projected expenses
• Target level of profit and contingencies

Question 5

Estimation of Losses

Answer 5

Paid Losses + Loss Reserves = Incurred Losses

Question 6

Delays in Data Collection and Use

Answer 6

• Delays by insured in reporting losses to insurers
• Time required to analyze data and prepare a rate filing
• Delays in obtaining state approval of filed rates
• Time required to implement new rates
• Time period during which rates are in effect, usually a full-year

Question 7

Ratemaking Methods

Answer 7

• Pure premium method
• Loss ratio method
• Judgement method

Question 8

Pure Premium Ratemaking Method

Answer 8

1. ) Calculate the pure premium
2. ) Estimate expenses per exposure unit based on the insurer’s last experience
3. ) Determine the profit and contingencies factor
4. ) Add pure premium and the expense provisions and divide by one minus the profit and contingencies factor

Question 9

Ratemaking Process Overview

Answer 9

1. ) Collect data
2. ) Adjust data
3. ) Calculate overall indicated rate change
4. ) Determine territorial and class relativities
5. ) Prepare rate filings and submit to regulatory authorities as required

Question 10

Collect Data

Answer 10

Three General Categories:

• Losses, both paid and incurred
• Earned premiums and/or exposure Information
• Expenses, including a profit and contingencies factor

Question 11

Adjust Data

Answer 11

• Adjust premium to current rate level
• Adjust historic experience for future development
• Apply trending to losses and premium

Question 12

Ratemaking Factor Variance for Different Types of Insurance

Answer 12

• Experience period
• Trending
• Large loss limitations
• Credibility
• Increased limits factors

Question 13

Experience Period

Answer 13

Factors in determining the appropriate experience period:

• Legal requirements (if any)
• The variability of losses over time
• The credibility of the resulting ratemaking data

Question 14

Types of Loss Reserves

Answer 14

• Case reserves
  
  • Amounts that represent the estimated loss value of each individual claim
• Bulk reserves
  
  • General provision for additional reserves, since the insurer cannot identify specific claims with inadequate or excessive case reserves or predict which claims reopen

Question 15

Bulk Reserves

Answer 15

Bulk Reserves can have three components:

• Incurred but not reported (IBNR) Reserves
• Reserves for losses that have been reported but for which the established case reserves are inadequate (IBNER- incurred but not enough reserves)
• Reserves for claims that have been settled and the reopened

Question 16

Analysis of Loss Reserves

Answer 16

The most common methods used estimate ultimate losses are:

• Expected loss ratio method
• Loss development method
• Bornhuetter-Ferguson method

Question 17

The Loss Development Method

Answer 17

1. ) Compile the experience into a loss development triangle
2. ) Calculate the age-to-age development factors
3. ) Select the development factors to be used
4. ) Apply factors to experience to make projections