CPCU 555 Flashcards – Module 8

[qdeck align=”center”]

[h] CPCU 555 – Module 8

[q] Underwriting profit

[a] The net profit an insurer earns from underwriting activities.  Calculated as the income received from premiums less incurred losses and underwriting expenses.

[q] Loss ratio

[a] A type of profitability ratio that reflects the percentage of premiums being consumed by losses.

Formula = [(Incurred Losses + LAE) / Earned Premiums]

[q] Expense ratio

[a] A type of profitability ratio that indicates the amount it costs to acquire, underwrite, and service insurance policies.

Formula = (Underwriting Expenses / Written Premiums)

[q] Combined ratio

[a] A type of profitability ratio that measures the profitability and financial health of an insurance company.

Formula = (Loss Ratio + Expense Ratio)

[q] Factors that affect profit ratios

[a] Factors:

Economic trends.

Reinsurance trends.

Internal trends.

New competitors.

Withdrawal of competitors.

Regulatory changes.

[q] Basic strategies for improving underwriting profitability

[a] Strategies:

Increasing premiums.

Decreasing losses.

Controlling expenses.

[q] Basic strategies for increasing sales and premiums

[a] Strategies:

Growing niche markets.

Adjusting rates and relativity factors.

Improving the relationships between producers and underwriters.

[q] Positive effects of controlling expenses

[a] Positive effects:

Lowering the combined ratio.

Allowing the insurer to reduce rates.

Rate regulators are more likely to approve rate adjustment requests from insurers that operate cost-effectively.

[q] Components of insurance pricing

[a] Components:

Pure premium.

Base rates.

Class relativity factors.

[q] Pure premium

[a] A premium that is charged per exposure unit.  It is calculated by estimating the value of projected losses associated with the line of business based on past claim data and current trends.

[q] Base rate

[a] Represents the pure premium, increased by a standard charge for expenses and profits.

[q] Process used to adjust insurance pricing to account for different levels of risk

[a] Process:

Classify the line of business into smaller groups and adjust rates for each group.

Analyze loss experience for each rate class.

Adjust rates to reflect the relatively higher or lower loss exposure of each rate class by applying rate relativity factors.

[q] Residential property rate relativities

[a] Insurers classify risks based on:

Type of building construction.

Limits and types of coverage purchased.

Level of public coverage available.

[q] Personal auto rate relativity factors

[a] Insurers classify risks based on:

Driver demographics.

Limits and types of coverage purchased.

Vehicle type and territory.

[q] Loss frequency

[a] The number of losses that occur within a specified period. The period is often described in terms of exposure units.

[q] Loss severity

[a] The amount of loss, usually measured in dollars, for a loss that has occurred.

[q] Ratemaking

[a] The process of incorporating the cost of losses and expenses and the need for profits into a pricing strategy.

[q] Factors other than underwriting that must be considered when establishing rates

[a] Factors:

Regulatory considerations.

Societal considerations.

Investment income considerations.

[q] Common insurance rate criteria in all states

[a] Common criteria:

Rates must be adequate.

Rates must be reasonable (not excessive).

Rates must not be unfairly discriminatory.

[q] Societal concerns reflected in ratemaking

[a] Rates should:

Be affordable.

Encourage risk control.

Be stable.

[q] Key indicators of insurer’s success

[a] Key indicators of success:

Ability to attract and retain insureds.

Ability to increase the size of the portfolio.

[q] Key policy indicators

[a] Indicators:

Policies in force (PIF).

New policy count.

Policy retention.

[q] Policies in force (PIF)

[a] A key policy indicator of an insurer.  It represents the number of policies that are effective at any point in time.  The actual PIF counts are often compared to the annual PIF goals to assess the growth or decrease in portfolio size.

[q] New policy count

[a] A key policy indicator of an insurer.  It represents the number of new policies written during a period of time, such as one quarter or one year.

[q] Policy retention

[a] A key policy indicator of an insurer.  It represents the percentage of policies that are renewed, usually on an annual basis

[q] Risk profile analysis

[a] The examination of the three key policy indicators at specific times or during specific time periods.  It can be used to uncover relationships between policy factors that may affect portfolio performance.

[q] Classification

[a] A risk profile analysis technique that entails assigning members of a dataset into categories based on known characteristics.

[q] Regression analysis

[a] A set of statistical processes for estimating the relationships between a dependent variable and one or more independent variables.

[q] Association rule learning

[a] A risk profile analysis technique that involves examining data to discover important relationships among variables.

[q] Credit scoring

[a] A decision-making tool that uses credit reports to develop a predictive score on the creditworthiness of an insurance applicant.

[q] Advantages of credit-based insurance scores

[a] Advantages:

Allows insurers to improve rating methodologies and develop premiums that are commensurate with expected loss levels.

Scores can be used to target existing customers who have lower loss potential.

[q] Disadvantages of credit-based insurance scores

[a] Disadvantages:

Somewhat complex and difficult to understand.

Regulators may prohibit use of credit scores.

[q] Catastrophe models

[a] Models that are used to simulate events, such as hurricanes or earthquakes, to measure expected future losses based on the insurer’s book of business.

[q] Elements of a personal lines catastrophe model

[a] Elements:

Geographic location.

Type of catastrophe (science component).

Exposure info (engineering component).

Replacement cost estimates.