what are five advantages of a high deductible program?
Siewert
- achieves price flexibility while passing additional risk to larger insureds
- reduces residual market charges and premium taxes
- gives cash flow advantages to insured (insurer pays claim first and seeks reimbursement from insured)
- provides incentive for insureds to control losses while protecting them from large losses
- allows ‘self-insurance’ without demanding state requirements
what do excess losses refer to?
Siewert
- losses excess of a specific deductible
- losses below deductible are retained by insured, losses above deductible paid by insurer - on per occurrence basis
how do aggregate limits work?
Siewert
-once aggregate deductible losses reach aggregate limit, insured stops retaining losses and insurer pays for everything else
when is the loss ratio approach for excess losses used?
Siewert
- when no data is available
- for immature years where data is sparse
what does the loss ratio approach for excess losses require?
Siewert
- database of individual accounts and pricing estimates
- estimate of full coverage loss ratio
- estimate of excess losses for both occurrence and aggregate limits
with what data/segmentation is the loss ratio determined?
Siewert
- use company experience by state, reflecting the individual account’s premium distribution
- supplement with industry experience if credibility is a problem
what are approaches for estimating the per occurrence charge?
(Siewert)
- estimating excess ratio based on company experience
- use industry excess ratio
what is used to calculate the aggregate loss charge?
Siewert
-NCCI Table M, which reflects size of account, deductible, state severity relativities, prospective rating period and rating plan parameters
what are advantages of the loss ratio approach?
Siewert
- can be used when no data is available or when data is immature
- loss ratio estimates can be consistently tied to pricing programs
- relies on more credible pool of company and industry experience
what are disadvantages of the loss ratio approach?
Siewert
- ignores actual emerging experience (not as useful for mature years)
- may not properly reflect account characteristics - dev. may emerge differently due to exposures written
how does an implied development approach work?
Siewert
- develop full cov. losses to ult
- dev. deductible losses to ult. by applying dev. factors that reflect inflation-indexed limits
- determine ultimate excess losses by subtracting limited ult. losses from the full coverage ult. losses
what do “deductible losses” refer to?
Siewert
all losses limited by the deductible
what needs to be considered when determining tail factors?
Siewert
-make sure full coverage tail factor is consistent with limited loss tail factors -> don’t develop limited losses beyond unlimited losses
why do we index deductible limits for inflation?
Siewert
- keeps proportion of deductible/excess losses constant about the limit from year to year
- allows us to combine different experience years
what are two ways to determine index value?
Siewert
- fit line to average severities over a long-term history
- use an index that reflects the movement in annual severity changes
what are 3 advantages of the implied development approach?
Siewert
- provides estimate of excess losses at early maturities, even when excess losses have not emerged
- dev. factors for limited losses are more stable than those determined for excess losses
- estimating deductible losses helps determine the asset value represented by service revenue
what is a disadvantage of the implied dev. approach?
Siewert
doesn’t explicitly recognize excess loss development
how does the direct dev. approach work?
Siewert
- focuses on excess dev. directly
- given dev. factors for limited and full cov. losses, excess LDFs are calculated so that excess factors combined with limited factors balance back to full coverage factors
what is an advantage of the direct dev. approach?
Siewert
-explicitly recognizes excess loss development
what are two disadvantages of the direct dev. approach?
Siewert
- excess factors tend to be overly leveraged and extremely volatile
- if excess losses have not yet emerged, can’t estimate IBNR (no losses to apply factors to)
how does the Credibility weighting/BF approach work?
Siewert
relies on weighting indications based on actual experience (ie direct dev. approach) with expected values (ie loss ratio approach)
what are three advantages of the cred. weighting/BF approach?
(Siewert)
- can determine liabilities directly or indirectly
- ability to tie into pricing estimates for recent years where excess losses have yet to emerge
- provides more stable estimates over time
what is a disadvantage of the cred. wting/BF approach?
Siewert
-ignores actual experience to the extent of the complement of credibility (may need to find weights that are more responsive to the actual experience)
how do we index limits?
Siewert
- for current year, use limits as stated
- for first prior year, adjust current year limits downward by an indexing factor
