special classifications

Question 1

what is the RV that is considered one of main factors in freq and severity of claims

Answer 1

-almost every rating algorithm has some RV that reflects geographic location of risk

Question 2

Few challenges when determining indicated rates for territories

Answer 2

• territory tends to be high correlated with other RVs
• territories are often set to be such small areas that data in each territory may have very limited credibility

Question 3

2 steps in territorial RM

Answer 3

1. establishing territorial bounds
2. determining indicated rates for each territory

Question 4

Establishing territorial boundaries

Answer 4

• define basic geographic unit
• estimate geographic systemic risk for each geographic unit and to distinguish it from both random noise and systematic risk for other correlated non-geo RVs

Question 5

GLMs can incorporate

Answer 5

• GLMs can incorporate geo-physical variables (rainfall) and geo-demographic variables (population density)
• still some unexplained geographic variance -> new variable to account for residual variation

Question 6

spatial smoothing techniques

Answer 6

can be applied to residual variable to smooth results

1. distance-based: credibility weighted with data from other units with weights diminishing with distance
2. adjacency-based: credibility weight with data from rings of surrounding units with weights diminishing with wider rings

Question 7

distance based

Answer 7

• easy to understand and implement but assumes distance has same impact for urban and rural risks and doesn’t consider physical boundaries
• best for weather-related perils

Question 8

adjacency based

Answer 8

• better reflects urban and rural differences and accounts for physical boundaries better
• best for socio-demographic perils (theft)

Question 9

clustering routines

Answer 9

-once indicated relativities are determined at basic unit level, these can be grouped into territories if desired by clustering routine

Quantile methods

Similarity methods

Question 10

determining correct relativities aka ILFs for other limits has become more important over time

Answer 10

As personal wealth grows, people need more coverage

Inflationary trend have more impact on increased limits

More lawsuits and higher jury awards over time

Question 11

why are standard RM approaches are problematic for ILFs

Answer 11

Generally less data at higher limits so results can be volatile

Analyses can produce results that are impractical to implement

Question 12

standard ILF approach

Answer 12

-rates for various limits are expressed as relativities/ILFs to rate for basic limit:

rate @ limit H = ILF(H) * rate @ limit B

Question 13

common assumptions for ILF approach

Answer 13

All UW expenses and profit are variable and don’t vary by limit

Freq and severity are independent

Freq is the same for all limits

Question 14

LAS(H)

Answer 14

limited average severity @ limit H=severity assuming every loss is capped at H

Question 15

ILFs with censored losses

Answer 15

have to use LAS for layers of loss

LAS(H)=LAS(B)+LAS(H-B xs B)*prob(x>B)

Question 16

why are deductibles popular

Answer 16

• reduce insured’s prem
• eliminate insurer from handling small nuisance claims
• provide incentive for insured to avoid or mitigate loss
• help reduce insures CAT exposure

Question 17

Standard method of pricing deductibles

Answer 17

Loss Elimination Ratio approach

Question 18

typical assumption of loss elimination approach

Answer 18

All UW expenses and profit are variable with prem

Question 19

ind relativity for deductible pricing

Answer 19

=excess ratio(D)=1-LER(D) = 1 - losses below d/ground up

Question 20

when you dont have ground up losses for deductible pricing

Answer 20

only policies with deductibles less than or equal to deductible you are pricing can be used to price the current deductible

= losses eliminated with new deductible/loss with old deductible

Question 21

LER approach will not consider and other issues

Answer 21

that claimant behavior may vary by deductible

• favorable selection occurs if low-risk insureds can choose higher deductibles -> LER will not recognize this
• dollar savings implied by deductible relativity may not be appropriate -> prem savings > deductible difference

Question 22

WC Size of Risk

Answer 22

• rating algorithms include components that recognize that FEs as % of prem should decrease as size of policy increases
• helps ensures small risks are not undercharged etc for FE

Question 23

expense constant

Answer 23

flat $ amount added to prem for each risk

Question 24

premium discount

Answer 24

applies % discount to larger policies to recognize that expenses are lower % of their premium

expense reduction = exp total (row1) - exp total

discount = reduction/(1-tax-profit)

Question 25

Small WC insureds generally have worse loss experience

Answer 25

- small usually have less sophisticated safety programs - small usually don’t have return-to-work programs for injured - not impacted by or do not qualify for experience rating so less incentive to prevent or mitigate injuries

Question 26

loss constant

Answer 26

- add flat $ amount to premium to equalize LRs between small and large risks - loss constants can apply only to small risks or can be applied to all risks

Question 27

insurance to value

Answer 27

ITV = ratio of coverage to replacement cost ## Footnote - properties are typically insured for amount that it would take to replace property if damaged - sometimes properties are not fully insured to full replacement cost

Question 28

indicated rate per $1k of coverage

Answer 28

will be higher for underinsured homes as long as partial losses are possible

Question 29

When properties are insured to less than full replacement, 2 issues:

Answer 29

1. insured will not be fully covered in event of total or near-total loss 2. if insurer assumes all homes are fully insured to their replacement cost when calc rates then prem charged for underinsured will not be adequate to cover expected losses for those policies -\> when prem not equal to expected costs, rates are not equitable

Question 30

coinsurance

Answer 30

- multiple parties each insure portion of risk - alter amount of losses that are covered - can be instituted when property is insured for less than coinsurance requirement set by insurer

Question 31

coinsurance formulas

Answer 31

a=min[cov/RC\*coins, 1] I=min[a\*L, cov] e=min[loss,cov]-I

Question 32

coinsurance graph

Answer 32

max penality = coverage amount penalty of 0 = coinsurance requirement and beyond