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29 Cards in this Set
- Front
- Back
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The primary ratemaking goals are to set rates that are sufficient yet not excessive and to set rates that are fair; a reasonable profit should be generated while maintaining a competitive position in the market
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Three components are involved in insurance rates
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1.Amount necessary to cover future claims
2.Amount necessary to cover expenses incurred in the future 3.Amount necessary for contingencies and to earn a profit |
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An actuary is an individual using technology and complex mathematical methods to analyze loss data and other data used in determinimg insurance rates.
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Advisory organizations supply insurers with prospective loss cost information to which the insurer must add an expense factor to determine a final rate. Four primary advisory organizations are
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(Memory Aid: A SIN)
1.American Association of Insurance Services (AAIS) 2.Surety Association fo America 3.Insurance Services Office (ISO) 4.National Council on Compensation Insurance (NCCI) |
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Three factors affecting ratemaking
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1.Estimating loss reserves
2.Data collection and use delays 3.Investment income |
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Five reasons for the delay before rates reflect loss experience
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(Memory Aid: PASTA)
1.Policyholders delay reporting losses 2.Amount of time necessary to analyze data and prepare the rate filing 3.State regulatory authorities delay approval of filed rates 4.Time necessary to inform agents and brokers of the new rates 5.Amount of time for rates to be in effect, usually a full year |
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Three ratemaking methods
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1.Judgement method: a ratemaking method relying heavily on an actuary's or underwriter's experience and knowledge with little or no statistics being used
2.Loss ratio method: a ratemaking method using a comparison of expected and actual loss ratios 3.Pure premium method: a process for calculating insurance rates involving the initial calculation of pure premium, followed by the addition of expense loading |
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Experience period: the loss experience period used by the insurer as the basis for new rates. Three factors to consider in determining the experience period are
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1.Legal requirements
2.Variability of losses over time 3.Credibility of the ratemaking data |
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The application of credibility varies depending on the insurance line:
1.Auto insurance: assumes statewide experience is fully credible 2.Fire insurance: statewide experience may not be fully credible |
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Four major steps in the process of ratemaking data development
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1.Gather data
2.Adjust date 3.Determine relativities for territories and classes 4.Prepare rate filings and submit to regulatory authorities, as necessary |
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Rate filing: a document created for and provided to state regulatory authorities; vary by state and must include seven items
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(Memory Aid: PIECES)
1.Proposed new rate schedule 2.Information to allow state insurance regulators to understand and evaluate the rate filing 3.Explanation, if applicable, of why the precentage change is not relevant to rates for all territories and rating classes 4.Calculation, if applicable, indicating how investment income is included in the rates 5.Expense loading data 6.Statement regarding the precentage change in the average statewide rate |
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Accident-year method
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A method of ratemaking data collection that uses incurred losses for an accident year and estimates earned premiums using formulas from accounting records; a compromise between the policy-year and the calendar-year methods
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Actuary
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An individual using technology and complex mathematical methods to analyze loss data an dother data used in determining insurance rates
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Advisory organizations
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Provide actuarial services to collect ratemaking data and calculate loss costs for a variety of insurance types
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Calendar-year method
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A method of ratemaking data collection that estimates incurred losses and earned premiums using formulas from accounting records; the least accurate method of collecting ratemaking statistics
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Contingencies and profit
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An allowance included in expense loading to protect the insurer from the possibility of actual claims and expenses exceeding estimated claims and expenses
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Earned exposure unit
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An exposure unit for which protection is actually provided during a specified period
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Expected loss ratio
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The loss ratio necessary for the insurer to achieve profit objectives; found by subtracting the expense provision from 100%
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Expense provision
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The amount included in a rate to pay the insurer's expenses, not including expenses for investment or loss adjustment
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Experience period
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The time period for which all relevant data are collected and anlayzed in ratemaking
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Exponential trending
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Assumes teh statistical series being projected will increase or decrease by a fixed percentage each year
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Judgement ratemaking method
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A ratemaking method relying heavily on an actuary's or underwriter's experience and knowledge with little or no statistics being used
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Linear trending
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Assumes teh statistical series being trended will increase or decrease by a fixed amount each year
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Loss adjustment expenses
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Expenses associated with claims adjusting
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Loss ratio method
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A ratemaking method using a comparison of expected and actual loss ratios
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Policy-year method
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The only statistics-gathering method providing an exact matching of losses, premiums, and exposure units to a specific group of insured entities
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Pure premium method
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A process for calculating insurance rates involving the initial calculation of pure premium, followed by the addition of expense loading
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Pure premium
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The amount included in a rate to pay losses incurred; may include loss adjustment expenses
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Ratemaking
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The process used by insurers when calculating insurance rates, which are a component of premium
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