actsc462_lec4

actsc462_lec4 - ACTSC 462/862 P&C Insurance Ratemaking...

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1 ACTSC 462/862 ACTSC 462/862 P&C Insurance Ratemaking Lecture 4
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2 Previous Lecture Previous Lecture > Basic Ratemaking – Chapter 6 •P r e m i u m = Losses + LAE + UW Expenses + UW Profit The different types of insurance losses How loss data is aggregated for ratemaking analysis Common metrics involving losses Adjustments made to historical loss data to make it relevant for estimating future losses in the context of ratemaking Treatment of loss adjustment expenses
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3 Basic Ratemaking Basic Ratemaking Chapter 7: Other Expenses and Profit
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4 Basic Ratemaking Basic Ratemaking Chapter 7 Chapter 7 > Premium= Losses + LAE + UW Expenses + UW Profit > Chapter covers: • How to derive projected underwriting expense ratios • How to incorporate the cost of reinsurance in a ratemaking analysis • How to incorporate an underwriting profit provision in rates
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5 Basic Ratemaking Basic Ratemaking Chapter 7 Chapter 7 > Simple example: • The average expected loss and LAE for each policy is $180. • Each time the company writes a policy, the company incurs $20 in expenses for costs associated with printing and data entry, etc. • 15% of each dollar of premium collected covers expenses that vary with the amount of premium, such as premium taxes. • Company management has determined that the target profit provision should be 5% of premium.
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6 Basic Ratemaking Basic Ratemaking Chapter 7 Chapter 7 > Underwriting Expense Categories: Commissions and brokerage are amounts paid to agents or brokers as compensation for generating business Other acquisition costs are expenses that are paid to acquire business other than commissions and brokerage expenses Taxes, licenses, and fees include all taxes and miscellaneous fees due from the insurer excluding federal income taxes General expenses include the remaining expenses associated with insurance operations and any other miscellaneous costs, excluding investment income expenses
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7 Basic Ratemaking Basic Ratemaking Chapter 7 Chapter 7 > Three different procedures used to derive expense provisions for ratemaking: 1. All Variable Expense Method 2. Premium-based Projection Method 3. Exposure/Policy-based Projection Method
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8 Basic Ratemaking Basic Ratemaking Chapter 7 Chapter 7 > All Variable Expense Method: • Essentially treats all expenses as variable (i.e. constant% of premium) • Assumes expense ratios during the projected period will be consistent with historical expense ratios • This approach is still widely used when pricing insurance products where total underwriting expenses are dominated by variable expenses (i.e., many commercial lines) .
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9 Basic Ratemaking Basic Ratemaking Chapter 7 Chapter 7 > All Variable Expense Method: • The choice to use countrywide or state data varies by type of expense • The actuary selects a ratio for each expense type based on either the latest year’s ratio or a multi-year average of ratios balanced with management input, prior expense loads, and judgment.
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This note was uploaded on 10/30/2011 for the course ACTSC 462 taught by Professor Wslennox during the Winter '11 term at Waterloo.

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actsc462_lec4 - ACTSC 462/862 P&C Insurance Ratemaking...

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