AS462_Lec05 - ACTSC 462/862 P&C Insurance Ratemaking...

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1 ACTSC 462/862 ACTSC 462/862 P&C Insurance Ratemaking Lecture 5
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2 Previous Lecture Previous Lecture > Basic Ratemaking – Chapter 7 Premium = Losses + LAE + UW Expenses + UW Profit 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 > Basic Ratemaking – Chapter 8 Pure premium method: Loss ratio method:
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3 Basic Ratemaking Basic Ratemaking Chapter 9: Traditional Risk Classification
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4 Basic Ratemaking Basic Ratemaking Chapter 9 Chapter 9 > Chapter covers: • The importance of charging equitable rates • Criteria for evaluating potential rating variables • Traditional univariate (one-way) techniques used to estimate the appropriate rate differentials for various levels of a given rating variable, including distortions introduced by each
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5 Basic Ratemaking Basic Ratemaking Chapter 9 Chapter 9 > Importance of Equitable Rates: • Adverse Selection: (example) – The average loss ( L ) and LAE ( EL ) is $180. There are no underwriting expenses or profit, so the average total cost is $180, and rates are set accordingly. – The insured population consists of 50,000 high-risk insureds (Level H) and 50,000 low-risk insureds (Level L) – The insurance market consists of two companies (Simple Company and Refined Company) that each currently insure 25,000 of each class of risk – H risks have a cost of $230, and L risks have a cost of $130 – Simple Company charges H and L risks the same rate, $180. Refined Company implements a rating variable to vary the rates according to the cost and, therefore, charges H and L risks $230 and $130, respectively – 1 out of every 10 insureds shops at renewal and bases the purchasing decision on price
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6 Basic Ratemaking Basic Ratemaking Chapter 9 Chapter 9 > Importance of Equitable Rates: Favourable Selection: Favourable selection is when a company identifies a characteristic that differentiates risk that other companies are not using options: 1. Implement a new rating variable 2. Use the characteristic for purposes outside of ratemaking (e.g., for risk selection, marketing, agency management) a company may not be able to (or may choose not to) implement a new or refined rating variable -
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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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AS462_Lec05 - ACTSC 462/862 P&C Insurance Ratemaking...

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