FINA 341 Hartwig Exam 2 UPDATED ACTUAL Questions And Correct Answers
Terms in this set (138)
Reinsurance Insurance for insurance companies
Arrangement by which the primary insurer that initially writes the insurance
transfers to another insurer part or all of the potential losses associated with such
insurance
Reduces underwriting risk
Effectively substitutes for capital
Treaty reinsurance
Facultative reisnsurance
Policy Reserves Liability item on the balance sheet that must be offset by assets equal to that
amount
Reserve for Amounts Held on Deposit Liability that represents funds that are owed to policyholders and to beneficiaries
Asset Valuation Reserve Statutory account designed to absorb asset value fluctuations not caused by
changing interest rates
Policyholders' surplus (assets - liabilities)
Less volatile in the life insurance industry than in the property and casualty
insurance industry
Not subject to the same type of huge catastrophe losses p/c insurers experience)
Rate making state laws "Rates should not be inadequate, excessive or unfairly discriminatory"
Adequate for paying all losses and expenses (and to earn a reasonable profit)
Should not be excessive, such that policyholders are paying more than the actual
value of their protection
Not be unfairly discriminatory; exposures that are similar with respect to losses
and expenses should not be charged significantly different rates
Rate-Making Objectives Easy to understand
Stable over short periods of time
Responsive over time to changing loss exposures (e.g., more hurricanes) and
changing economic conditions (e.g., lower interest rates)
Encourage loss control activities
Pure premium Portion of the rate needed to pay losses and loss adjustment expenses (i.e., costs
arising directly from the claim)
Loading Amount that must be added to the pure premium for other expenses, profit, and a
margin for contingencies
Gross rate Pure premium and a loading element
, Gross premium Paid by the insured consists of the gross rate multiplied by the number of
exposure units
Judgment Rating Each exposure is individually evaluated, and the rate is determined largely by the
judgment of the underwriter
New chemical plant
Class, or Manual Rating Exposures with similar characteristics are placed in the same underwriting class,
and each is charged the same rate
25-year old male drivers in SC with 1 moving violation
Determined using pure premium method and loss ratio method
Pure premium method Dividing the dollar amount of incurred losses and loss-adjustment expenses by
the number of exposure units
Loss ratio method Compared with the expected loss ratio, and the rate is adjusted accordingly
Pure Premium Method Example Pure Premium = (Incurred Losses and LAE)/(# Exposure Units)
Assume USC Insurance insures 500,000 autos in a given $33,000,000/500,000 = $66 (i.e., Pure Premium = $66 per insured auto)
underwriting class (e.g., male teenage drivers)
Over the past year, USC incurred losses and loss BUT—need to add a loading for expenses (usually expressed as a % of the "gross
adjustment expenses of $33 million in this class of rate"
business If expenses = 40% of the gross rate, then:
Gross Rate = (Pure Premium)/(1-Expense Ratio) = $66/(1-.40) = $110
Loss Ratio method example Actual Loss Ratio = $800,000/$1,000,000 = 0.80
Assume USC Insurance has incurred losses and loss Based on the past 10 years of experience, Expected LR = 0.70
adjustment expenses of $800,000 and earned premium How much do rates need to be increased to reflect the new, higher LR?
of $1 million Calculate % difference between actual and expected:
(0.80 - 0.70)/0.70 = 14.3% Implies rates need to rise by 14.3%
Merit Rating Rating plan by which class rates are adjusted upward or downward based on
individual loss experience. Based on the assumption that loss experience that loss
experience of a particular insured will differ substantially from that of other
insureds
Types: schedule, experience, retrospective
Schedule rating plan Each exposure is individually rated
Wood v masonry
Occupancy (residential v commercial)
Protection (fire departments near)
Experience rating Class or manual rate is adjusted upward or downward based on past loss
experience (often the past 3 years)
Refers to the practice of basing rates on past experience
Terms in this set (138)
Reinsurance Insurance for insurance companies
Arrangement by which the primary insurer that initially writes the insurance
transfers to another insurer part or all of the potential losses associated with such
insurance
Reduces underwriting risk
Effectively substitutes for capital
Treaty reinsurance
Facultative reisnsurance
Policy Reserves Liability item on the balance sheet that must be offset by assets equal to that
amount
Reserve for Amounts Held on Deposit Liability that represents funds that are owed to policyholders and to beneficiaries
Asset Valuation Reserve Statutory account designed to absorb asset value fluctuations not caused by
changing interest rates
Policyholders' surplus (assets - liabilities)
Less volatile in the life insurance industry than in the property and casualty
insurance industry
Not subject to the same type of huge catastrophe losses p/c insurers experience)
Rate making state laws "Rates should not be inadequate, excessive or unfairly discriminatory"
Adequate for paying all losses and expenses (and to earn a reasonable profit)
Should not be excessive, such that policyholders are paying more than the actual
value of their protection
Not be unfairly discriminatory; exposures that are similar with respect to losses
and expenses should not be charged significantly different rates
Rate-Making Objectives Easy to understand
Stable over short periods of time
Responsive over time to changing loss exposures (e.g., more hurricanes) and
changing economic conditions (e.g., lower interest rates)
Encourage loss control activities
Pure premium Portion of the rate needed to pay losses and loss adjustment expenses (i.e., costs
arising directly from the claim)
Loading Amount that must be added to the pure premium for other expenses, profit, and a
margin for contingencies
Gross rate Pure premium and a loading element
, Gross premium Paid by the insured consists of the gross rate multiplied by the number of
exposure units
Judgment Rating Each exposure is individually evaluated, and the rate is determined largely by the
judgment of the underwriter
New chemical plant
Class, or Manual Rating Exposures with similar characteristics are placed in the same underwriting class,
and each is charged the same rate
25-year old male drivers in SC with 1 moving violation
Determined using pure premium method and loss ratio method
Pure premium method Dividing the dollar amount of incurred losses and loss-adjustment expenses by
the number of exposure units
Loss ratio method Compared with the expected loss ratio, and the rate is adjusted accordingly
Pure Premium Method Example Pure Premium = (Incurred Losses and LAE)/(# Exposure Units)
Assume USC Insurance insures 500,000 autos in a given $33,000,000/500,000 = $66 (i.e., Pure Premium = $66 per insured auto)
underwriting class (e.g., male teenage drivers)
Over the past year, USC incurred losses and loss BUT—need to add a loading for expenses (usually expressed as a % of the "gross
adjustment expenses of $33 million in this class of rate"
business If expenses = 40% of the gross rate, then:
Gross Rate = (Pure Premium)/(1-Expense Ratio) = $66/(1-.40) = $110
Loss Ratio method example Actual Loss Ratio = $800,000/$1,000,000 = 0.80
Assume USC Insurance has incurred losses and loss Based on the past 10 years of experience, Expected LR = 0.70
adjustment expenses of $800,000 and earned premium How much do rates need to be increased to reflect the new, higher LR?
of $1 million Calculate % difference between actual and expected:
(0.80 - 0.70)/0.70 = 14.3% Implies rates need to rise by 14.3%
Merit Rating Rating plan by which class rates are adjusted upward or downward based on
individual loss experience. Based on the assumption that loss experience that loss
experience of a particular insured will differ substantially from that of other
insureds
Types: schedule, experience, retrospective
Schedule rating plan Each exposure is individually rated
Wood v masonry
Occupancy (residential v commercial)
Protection (fire departments near)
Experience rating Class or manual rate is adjusted upward or downward based on past loss
experience (often the past 3 years)
Refers to the practice of basing rates on past experience
