1) What are the major components of any rate?
· Insurance is one of the few services which have to be priced before its cost is known.
The major components of any rate are and are done by underwriters:
1) Anticipated cost of settling claims;
2) Acquisition costs of the business. i.e. commissions, marketing and other related costs;
3) Costs of administering the process.
2) Differentiate between ratemaking and rating.
· Ratemaking is accomplished by actuaries whereas rates are applied by the underwriter.
3) What is retrospective rating?
· The exception to the forecasting method of ratemaking is a method used on some very large commercial accounts.
· The retrospective rating plan is based on the insured’s actual loss experience during the policy term.
· The client and insurer agree on a formula under which the ultimate cost of claims will be borne by the insured.
· They agree to a minimum and maximum premium however the premises is that the insurer recoups the cost of claims, expenses, and an insurance charge.
4) Explain the ratemaking process.
Ratemaking is accomplished by actuaries and is a process which involves:
1) Analyzing stats on the frequency and severity of past claims;
2) Estimating the ultimate cost of settling currently outstanding claims;
3) Using information that has been analyzed to estimate the cost of claims which will occur in the future (trending).
· Ratemaking involves prospective analysis because it produces figures that will be applied to claims in the future.
· Yesterday’s statistics are used to calculate today’s premium in order to pay for tomorrow’s losses.
· Contrary to a common misconception, when premiums are increased, it is to pay for anticipated increases in the future cost of claims on policies written today, not to recover any premium deficiency on policies written in prior years.
5) What is class rating? What are its advantages?
· Is used when stats can be gathered on a large number of risks that share common characteristics.
· This makes it possible to statistically measure the claims experience for each risk factor, something that is not possible with more complex risks.
· It can be used to determine average class cost per unit insured.
· The larger the pool of loss upon which statistical information is drawn, the greater the possibility that the results will be more accurate.
· Advantages: eliminates much of the judgement that is needed to price a risk and streamlines the policy issuing process thus resulting in the reduction of production costs.
6) What is schedule rating? When is it used?
· Is used when the body of statistical data is too fragmented to permit class rating.
· Rates are based on a schedule or manual which lists a multitude of characteristics which over a period of many decades have been identified by underwriters as important factors in measuring the degree of risk.
· Schedule rating requires underwriters to use their judgement.
· The process of schedule rating involves the fixing of a base rate and is subject to debits and credits.
· Once the rate is selected, it will be subject to loading for overhead and profit.
· Rates for schedule-rated risks are modified from time to time based on statistical exhibits that are broad enough in scope to produce a credible indication of future claims costs.
7) What is loading?
· The addition of overhead and profit to the rate selected.
· Underwriters determine the insurance cost, which includes projected losses, the insurer’s overhead, and a profit loading for every unit of the exposure base chosen.
8) Identify FIVE (5) situations when statistical analysis of a risk for underwriting purposes would be less useful.
1) Insufficient statistical data
2) Familiarity with the industry
3) Sufficient data but difficulty in comparing risks
4) Statistical improbability of loss that does not rule its possibility
5) Underwriter looks beyond loss record
9) How does competition in the marketplace affect rating?
· The ultimate determinant of the price paid by the consumer is competition in the marketplace.
· In periods of intense competition, it is not uncommon for the book rate to be substantially discounted in order to take a business away from a competitor or prevent it from being taken by a competitor.
10) How do regulators intervene with the rating process?
· The governments of most provinces intervene actively in automobile insurance and some governments have taken over most or all auto business from the private sector.
· Most other provinces’ governments control premium levels and rating criteria through rating boards.
11) What two regulatory overview systems exist over rate filing?
· In jurisdictions where a new rating program can be implemented as soon as they are filed, the insurer must still wait approval by the regulatory body.
· Insurers must provide adequate documentation to support rate increases.
· Governments are permitted to withdraw approval if the rates do not meet with regulatory criteria and in some cases, fines might be assessed against the insurer.
· In jurisdictions where insurers must have prior approval of rating increases, the insurer must submit proposed changes and rating to the regulator in advance of their implementation.
· In many cases the law states that rates are deemed to be approved if no objection is registered within a given period of time.
· Sometime regulations require that public meetings be held when rate changes fail to meet certain criteria.
Effects of reforms:
- Loss in both cost and production time
- Underwriting training is required
- Computer systems need to be upgraded
- New rating software must be developed
- Modifications for data capturing and reporting are required
- New policy forms or other documentation are required for any changes in benefits or coverage
12) Is rating ever completely fair to everyone? Explain.
· The risk spreading mechanism breaks down when cost-based rating is not the basis used to set premiums.
· Tinkering with the cost-based rating process creates its own form of discrimination and results in inequities which cannot be justified.
· Policyholders placed in the open market end up subsidizing and inadequately rated risks because the loss suffered on pooled residual market business is factored in to the rate levels of all policyholders who are not in the pool.
No comments:
Post a Comment