SOA Exam FAM: Short-Term Insurance

What is short-term insurance?

products with a shorter life cycle and are renewed and settled within months (automobile and homeowners)

What’s an example of long-term insurance?

life insurance

What is a deductible?

the amount of each claim that the policyholder is responsible for paying before the insurer will pay a claim

What’s the difference between a disappearing deductible and a franchise deductible?

Disappearing deductible decreases linearly to 0 within a loss range while a franchise deductible decreases to 0 as soon as the loss exceeds the deductible

What are pros of a deductible?

• eliminate claims for small losses

• average claim payment is reduced

• policyholders tend to be more cautious

• higher deductible so reduce premium

Cons of deductibles?

• policyholder may be disappointed if claim not paid in full

• marketing gets complicated with d

• insureds may inflate the claim to recover the deductible

What is the purpose of reinsurance?

If the insurance companies (i.e. the primary insurers) want to pass this risk to other entities, they can purchase reinsurance.

What is the cedant?

the primary insurer under a resinsurance contract

What are some functions of reinsurance?

• Capital relief

• Increase underwriting capacity

• Catastrophe protection

• Stabilize loss experience

• Risk diversification

• Technical expertise

• Withdrawal

Recall that the concept of credibility is to assign weights to different sources to produce the best estimate of the future outcome. This estimate of the future outcome is called the

credibility premium

In the case of partial credibility, P_c is calculated by assigning a weight of Z to the sample mean, and a weight of 1-Z to the value from a more general source, commonly known as the

manual premium

Paid losses

are loss amounts that have already been paid to claimants.

Case reserve

is an estimate of the remaining amount of money needed to ultimately settle a claim

Incurred loss, or reported loss

is the sum of paid losses and the current case reserve

Loss Reserve =

Case Reserve + IBNR Reserve = Estimated Ultimate Losses - Losses Paid-to-Date

IBNR Reserve =

Estimated Ultimate Losses - Losses Incurred-to-Date

Loss Reserve - IBNR Reserve =

Losses Incurred-to-Date - Losses Paid-to-Date = Case Reserve

Under the expected loss ratio method, we

estimate the ultimate losses by multiplying the earned premium by the expected loss ratio

What is the loss ratio?

the ratio of losses to premiums. In other words, it is the percentage of the premium received that the insurer pays out in losses.

What is the chain-ladder method?

loss development method or loss triangle method, is another popular loss reserving method. This method observes patterns in historical loss development and assumes that future losses will continue to develop in a similar manner.