EXAM 5 SECTION D

individual risk rating

• Prospective

  • Experience Rating

  • Schedule Rating

  • Composite Rating

• Retrospective

same renewal between single no cred experience credit

Retrospective vs Prospective Rating

Responsiveness

• Retrospective → more responsive

  • Losses during policy period impact prem of _____ period

• Prospective → less responsive

  • Chg prem only on _____

Stability of Prem

• Retrospective → less stable

  • Prem chg not only _____ periods but also within same period

  • Uses _____ year data & _____ _____

• Prospective → more stable

  • Prem don’t change within policy period

  • Sched rating → mod determined at start of policy term & doesn't change

  • Exp rating → uses multiple yrs of _____ & applies cred

Incentive for Risk Control

• Retrospective → more immediate incentive

  • Reduced loss result in lower prem for same term

• Prospective → less incentive

  • Exp rating → takes time before reduced loss impacts prem

  • Sched rating → uncertain if will be given sched _____

standard prem

= Manual Prem x Exp Mod Factor x Sched Mod Factor

experience history

______ Rating: gives credit or debit based on insured’s claims _____ on prior terms

Mod = % debit or credit

• ISO CGL → pos is debit, neg is credit

  • +1 to get factor

• NCCI → already in factor form!

stability responsiveness recent stable

Experience Rating → length of Experience Period

• Balance ______ vs ______

• Short period → more responsive to _____ losses

  • But less cred, less _____ mod factors

prem detrended CSLC EER LDF basic msl

ISO CGL Experience Rating

**CSLC = Expected Ult Basic Lim Loss&ALAE NOT limited by MSL

• If no MSL, EER = 1!

STEPS

• For each subline, calculate Basic Lim Expected Loss

  • BLEL = Expected LR x Basic Lim _____

• For each subline & year, calculate CSLC

  • CSLC = BLEL _____ back to each year

  • Total CSLC → sum across all sublines & years

• For each subline & year, calculated Expected Dev

  • Expected Dev = _____ x _____ x _____

    • ***This LDF is more like % unreported

  • Sum to get Total Expected Dev (for AER num)

• Actual Basic Lim Loss&ALAE limited by MSL

  • Cap each individual actual loss at _____ lim

  • Add ALAE and cap Loss&ALAE at _____ (Max Single Loss)

  • Sum to get part of AER num

Mod = Z x (AER - EER)/EER

• Add 1 to get factor

z eer

ISO CGL Experience Mod

Mod = _____ x (AER - EER)/_____

*Add 1 to get factor

overly influencing freq sev expected impact cred

ISO CGL Experience Rating

Why cap losses at basic lim & MSL?

• Prevent large individ claims from _____ _____ experience mod

• Make plan more responsive to _____ than _____

Why does MSL inc as size of risk inc?

• Larger risk = larger _____ loss

• So less _____ loss of a given size will have on mod

  • MSL inc to allow for more _____

primary excess

NCCI Experience Rating

• Only use loss (no ALAE)

  • Split into 2 portions:

    • _____ → capped at C

    • _____

  • Cred-weigh each separately

A = actual loss

E = expected loss

Z_e = W x Z_p

*Sometimes will be given a stabilizing value

• Add to both num & denom!

weighting ballast payroll capped payroll elr

NCCI Experience Rating (another formula)

• W = _____ Value

• B = _____ Value → stabilizing value

• For each class i:

  • D_i = D-Ratio

  • ELR_i = Expected Loss Rate

    • Expected Loss per $100 _____

STEPS:

• Calculate A_p = actual loss _____ at C

  • A_e = A - A_p

• Expected Loss for class i

  • E_i = (______i/100) x ______i

  • Sum to get E = Expected Total Loss

• Expected Primary Loss

  • E_p = sum(D_i x E_i)

• Expected XS Loss

  • E_e = E - E_p

subjectively experience

Schedule Rating: UW _____ assign credit/debit to individual risks

• Based on risk chars NOT already reflected in _____ rating

composite rating

rating a policy w/ multiple coverages using a single exposure base

large ded policies

large employers purchase policies w/ large ded

• insured retain more loss/risk

Calculations:

• Use standard PP formula

• Num → only use expected loss XS of ded!

• XS Ratio = 1 - LER

• Expected XS Loss = XS Ratio x Expected Ground-Up Loss

• **PAY ATTENTION TO WHAT RATIOS APPLY TO!

  • Ground up, XS, loss below ded

  • incl/excl ALAE

incentive ulae reimbursement credit profit

Considerations of Large Deductible:

1. Claims Handling: who’ll be responsible for adjusting claims below ded

   • Insured → usually hire a TPA, less _____ to keep loss below ded

   • Insurer → higher _____

2. Application of Ded: loss only or loss+ALAE?

3. Ded Processing: if insurer pays all loss first, then seek _____ for below ded

   • Extra FE:

     • Cost to bill & process these amts

     • _____ risk in case insured unable to pay

4. Risk Margin: losses above large ded are difficult to est

   • Inc _____ margin to reflect higher risk

(b+ca)t lae taxes

NCCI Retrospective Premium

R = _____ H ≤ R ≤ G

• R = Retro Prem → capped between H, G

• b = Basic Prem

  • Profit & Expenses (excluding _____, _____)

  • Net insurance charge

• A = Rept Loss (may or not incl ALAE)

  • May be capped by Per Occurrence Limit

• C = Loss Conversion Factor

  • CA = converted loss

• T = Tax Multiplier

e - (c-1)e(a) + ci

NCCI Retrospective Basic Prem

b = ______

e = Expense & Profits (excl Taxes)

CI = Converted Net Insurance Charge

• **Often given as a ratio to STANDARD PREM!

expenses profits lae taxes net insurance charge

NCCI Retro Rating Basic Prem

• Total _____ & _____

  • Excluding _____ & _____

• _____ _____ _____ for limiting prem by max&min

e(a) c

Converted Net Insurance Charge: charge for limiting prem by max & min

CI = (Insurance Charge - Savings) x _____ x _____

downwards rept loss

How could retrospective prem change between adjustments?

Ex: At first adjustment, retro prem capped @ max prem

• Can only develop _____

• Will only dec if _____ _____ dec

  • Case reserve dec

  • Settled for less than current case reserves