Part 4 - Question Bank

Question 1

List the factors affecting the number of rating factors selected when modelling experience for pricing purposes

Answer 1

• The exact purpose of the exercise
• The number of rating factors currently being used in the rating
• The number of rating factors used for pricing by competitors
• The capacity of the model being used
• The time available to perform the investigation
• IT restrictions on how many rating factors can be incorporated into rating algorithms
• The quantity of data available
• The judgement applied by the modeller
• Sales channel (may affect level of complexity required)
• Level of competition in the market for the class of business being modelled
• Adjustments made to data either in cleaning, trending or developing

Question 2

Define experience rating and briefly describe the various systems used

Answer 2

Experience rating is a system whereby the premium of each individual risk depends, at least in part, on the actual claims experience of that individual risk.

This can be applied either prospectively or retrospectively. Retrospective is done via an adjustment premium.

Based on either number of claims or on amounts. A credibility measure is usually applied on claims experience.

Question 3

Arguments supporting experience rating in general insurance

Answer 3

• Premiums better reflect risk
• Encourages better behaviour
• Discourages small claims
• might be wanted by policyholders

Question 4

Outline the main problems that can arise when attempting to derive increased limit factors (ILFs) for casualty (liability) business.

Answer 4

• Lack of volume and of credibility of data
• Information about large losses may be lost, due to impact of policy limits
• Adjustments for trend: Working out what the adjustment should be, and then adjusting the ILF appropriately
• Many claims may still be open: Take a long time to settle and the final amount may be different from current estimate