Insurance Chapter 7

3 types of property/casualty rate making

-Class -Judgment Rating -Merit Rating

Loss reserve (balance sheet liabilities)

(estimated cost of settling claims for losses that have occurred) is an estimated amount for: Claims reported and adjusted, but not yet paid Claims reported and filed, but not yet adjusted Claims incurred but not yet reported to the company

Policy reserves Life insurers liabilities

(legal reserves) are a liability item on the balance sheet that must be offset by assets equal to that amount - represent an obligation to pay future policy benefits.

State law requirements

-Rates should be adequate for paying all losses and expenses -Rates should not be excessive, such that policyholders are paying more than the actual value of their protection -Rates must not be unfairly discriminatory; exposures that are similar with respect to losses and expenses should not be charged significantly different rates

Rate making objectives

-Rates should be easy to understand -Rates should be stable over short periods of time -Rates should be responsive over time to changing loss exposures and changing economic conditions -The rating system should encourage loss control activities

Investment Income Ratio

compares net investment income to earned premiums Net Investment Income / Earned Premiums

Balance Sheet

is a summary of what a company owns (assets) and what it owes (liabilities), and the difference between total assets and total liabilities is owners' equity/policyholders surplus Total Assets = Total Liabilities + Policyholders Surplus

Judgment Rating

Diversity within class

Combined Ratio

If it exceeds 1 (100 %), it indicates an underwriting loss; below that, underwriting profit.

Pure Premium Method

the pure premium can be determined by dividing the dollar amount of incurred losses and loss-adjustment expenses by the number of exposure units

D

All of the following are methods of establishing case reserves EXCEPT A. average value method. B. tabular method. C. judgment method. D. single premium method.

Pure premium

Incurred losses and loss adjustment expenses / Number of exposure units Expressed as $ amount

Loss reserve

Large liability on a property/casualty insurer's balance sheet - represents the estimated cost of settling claims for losses that have occurred but have not been paid as of the valuation date. THINK - Some liability claims (bodily injury/property damage) may take a LONG time to settle (litigation). Property insurance claims (auto damage, homeowner's claim) may be much simpler/faster to settle

Class

Most commonly used property/casualty rate making

Financial operations

State regulated to protect policy holders' future benefits and ensure financial health of insurers (solvency)

Financial operations

The Big Picture: Fiduciary responsibility to policy holders

Methods for determining case reserves

The judgment method The average value method The tabular method

Pure Premium Method Loss Ratio Method

Two methods to determine class rates

Experience rating

Under one type of merit rating plan, the class rate is adjusted upward or downward based on the insured's past loss history. This type of merit rating plan is known as A. retrospective rating. B. judgment rating. C. experience rating. D. schedule rating.

Merit rating

adjusted based on individual loss experience

Gross rate

consists of the pure premium and a loading element

Gross Premium

gross rate * number of exposure units

Rate

is the price per unit of insurance.

D

Actuaries at ABC Insurance Company are determining the pure premium rate to charge for a liability insurance line. The actuaries estimate that the losses and loss adjustment expenses for a group of 125,000 exposure units would be $10 million. What is the pure premium per unit for this coverage? A. $40 B. $500 C. $800 D. $80

Assuring large profits for insurance companies

All of the following are regulatory objectives of rate making EXCEPT A. assuring that insurance rates are not unfairly discriminatory. B. assuring that insurance rates are not excessive. C. assuring that insurance rates are adequate. D. assuring large profits for insurance companies.

Net single premium

Bruce is an actuary for The Feelings Mutual Life Insurance Company. Bruce calculated the present value of the future death benefit payable under a life insurance policy. The value he calculated considered mortality and investment income only, and did not include a loading for insurance company expenses. The value that Bruce calculated is known as the A. unearned premium reserve. B. net amount at risk. C. gross premium. D. net single premium.

C

In one type of property and casualty insurance rate making, exposures with similar characteristics are placed in the same underwriting category, and each is charged the same rate. This type of rate making is called A. judgment rating. B. experience rating. C. class rating. D. schedule rating.

Combined Ratio

Loss ratio + Expense Ratio

150

Mary Beth is an actuary for XYZ Property Insurance Company. Mary Beth calculated the pure premium rate for a coverage line to be $120. Assuming an expense ratio of 20 percent (expenses equal to 20 percent of the gross rate), what is the gross rate for this coverage? A. $160 B. $144 C. $150 D. $140

Class

Most rates are _______ rates

Less

Policyholders' surplus is ______ volatile in the life insurance industry than in the property and casualty insurance industry

Ways to measure performance for life insurers

Pre-tax or after-tax net income compared to total assets Rate of return on policy owners' surplus

Can If

Property/casualty insurer _____ lose money on underwriting operations, but still report positive net income _____ investment income offsets underwriting loss.

Gross rate

Pure premium / 1 - expense ratio

Balance sheet liabilities

Remember: Premiums are paid in advance - BUT - Protection period extends beyond when premium paid Reserves must be established to assure that future losses can be paid

Life insurer balance sheet

The assets of a life insurer have a longer duration, on average, than those of property and casualty insurers Because many life insurance policies have a savings element, life insurers keep an interest-bearing asset called "contract loans" or "policy loans" A life insurance company may have separate accounts for assets backing interest-sensitive products, such as variable annuities

C

The difference between an insurer's total assets and total liabilities is called A. net income. B. total revenues. C. policyholders surplus. D. loss reserves.

Revenue

The two principal sources of revenue for an insurance company are premiums and investment income

11 only

Which of the following statements is (are) true with respect to property and casualty insurers' loss reserves? Reserves are assets of property and casualty insurers. Property and casualty insurers are required to maintain reserves for unearned premiums and for losses. II only both I and II I only neither I nor II

I only

Which of the following statements is(are) true with respect to a property and casualty insurer's combined ratio? A combined ratio less than 1 (or 100 percent) indicates the insurer made money on its underwriting activities. Investment income is considered in the combined ratio calculation. I only Neither I nor II both I and II II only

Loading

amount added to the pure premium for other expenses, profit, and a margin for contingencies. It is called the expense ratio and is expressed as a percentage of the gross rate.

Case reserves

are loss reserves that are established for each individual claim

Earned premiums

are those premiums where the service (protection) has passed

Exposure Unit

differs according to the line of insurance and is defined by the insurer Ex: Fire: $100 of coverage; Product liability: $1000 of sales; Auto collision: $1000 of car value; Workers comp: $1000 of payroll

Net gain from operations

equals total revenues less total expenses, policyowner dividends, and federal income taxes

Loss ratio method

establishes aggregate loss reserves for a specific coverage line. Loss ratio x premiums earned during specified time period

Expenses

include the cost of adjusting claims, paying the insured losses that occurred, underwriting expenses including commissions to agents, premium taxes, and general insurance/office/administration expenses - "overhead".

Loss adjustment expenses (balance sheet liabilities)

is a liability item that represents the costs associated with investigating, settling and paying reserved claims. Above and beyond the claim amount.

Unearned premium reserve

is a liability item that represents the unearned portion of gross premiums on all outstanding policies at the time of valuation - Must pay for losses that occur during the policy period refunds to policyholders that cancel their coverage basis for determining the amount that must be paid to a reinsurer for carrying reinsured polices

Overall operating ratio

is equal to the combined ratio minus the investment income ratio

Loading

is the amount that must be added to the pure premium for other expenses, profit, and a margin for contingencies

Policy holders surplus

is the difference between an insurance company's assets and liabilities The stronger a company's surplus position, the greater is the security for its policyholders Policyholders surplus can provide a "cushion" in the event liabilities are more than anticipated. Remember - Estimated loss - forward looking

Pure premium

is the portion of the rate needed to pay losses and loss adjustment expenses

Exposure unit

is the unit of measurement used in insurance pricing

Gross premium

paid by the insured consists of the gross rate multiplied by the number of exposure units

Loss ratio

ratio of incurred losses and loss adjustment expenses to premiums earned (what's the relationship between the business we have written and the losses associated, including expense of dealing with losses) Incurred losses + Loss Adjustment Expenses / Premiums Earned

Expense ratio

ratio of underwriting expenses to premiums written (how much is it costing us to underwrite the business in the first place) Underwriting expenses / premiums written

Income and Expense statement

summarizes revenues and expenses paid over a specified period of time

Loss Ratio Method

the actual loss ratio is compared with the expected loss ratio, and the rate is adjusted accordingly