Practice Exam for AIDA 182 Assignment 5 - Setting Loss Reserves Questions and Answers

Accident-year method - CORRECT ANSWER-A method of organizing ratemaking statistics that uses incurred losses for an accident year, which consist of all losses related to claims arising from accidents that occur during the year, and that estimates earned premiums by formulas from accounting records. Average method - CORRECT ANSWER-A method to establish a case reserve by using an average amount for specific categories of claims. The case reserve for specific categories of claims is set at an average amount that's based on an analysis of past claims and adjusted for inflationary changes, changes in amounts insured, and other factors that may cause future payments to differ from past payments. This method is most suitable for types of insurance in which claims are relatively frequent, reported and paid promptly, and not subject to extreme variations, such as auto physical damage. If used alone, the average method may produce inadequate reserves for liability claims with a wide variation in payment amounts and long delays in settlements (such as medical malpractice insurance and product liability insurance). In these cases, the average method and the judgment method are sometimes used together. Bornhuetter-Ferguson Method - CORRECT ANSWER-Estimates the incurred but not reported (IBNR) reserve using expected losses and an IBNR factor rather than depending on judgmental weights. It is frequently used when the losses reported to the insurer are not mature enough to use the loss triangle method. One weakness of the Bornhuetter-Ferguson method is the level of inherent subjectivity that is involved in selecting IBNR factors, which can be estimated using a variety of techniques applied to industry data or historical insurer data. Even small changes in assumptions can cause wide variations in IBNR reserves and thereby net income, sometimes changing a profit to a loss or vice versa. Bulk reserve - CORRECT ANSWER-Reserves established for the settlement of an entire group of claims. Bulk/aggregate reserves estimate 3 types of costs - CORRECT ANSWER-The growth in reported case reserves or an amount for reported losses for which case reserves are inadequate Losses that are assumed to have happened