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CPCU Chapter 7
CPCU Chapter 7 Acutarial Operations
| Term | Definition |
|---|---|
| Data Mining | – the process of extracting hidden patterns from data that is used in a wide range of applications for research and fraud detection. |
| Ratemaking | the process insurers use to calculate insurance rates, which are a premium component |
| Pure premium | the average amount of money an insurer must charge per exposure unit in order to be able to cover the total anticipated losses for that line of business |
| Expense provision | the amount that is included in an insurance rate to cover the insurer’s expenses and that might include loss adjustment expenses but that excludes investment expenses claims |
| Loss expense (loss adjustment expense or LAE) | the expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy |
| Allocated loss adjustment expense (ALAE) | the expense that an insurer incurs to investigate, defend and settle claims that are associated with a specific claim. |
| Unallocated loss adjustment expense (ULAE) | loss adjustment expense that cannot be readily associated with a specific claim. |
| Ultimate loss | the final paid amount for all losses in an accident year |
| Loss reserve | are estimates of future payments for covered claims that have already occurred, whether the claims are reported or not. |
| Incurred losses | the losses that have occurred during a specific period, no matter when claims resulting from the losses are paid. |
| Experience period | the period for which all pertinent statistics are collected and analyzed in the ratemaking process |
| Investment income | interest, dividends, and net capital gains received by an insurer from the insurer’s financial assets, minus its investment expenses |
| Pure premium method | a method for calculating insurance rates using estimates of future losses and expenses, including a profit and contingencies factor |
| Fixed expenses | stated as dollar amounts per exposure units |
| Variable expenses | stated as percentage of the rate |
| Loss ratio method | a method for determining insurance rates based on a comparison of actual and expected loss ratio |
| Judgment ratemaking method | a method for determining insurance rates that relies heavily on the experience and knowledge of an actuary or an underwriter who makes little or no use of loss experience data |
| Advisory organization | an independent organization that works with and on behalf of insurers that purchase or subscribe to its services. |
| Loss cost multiplier | a factor that provides for differences in expected loss, individual company expenses, underwriting profit and contingencies; when multiplied with a loss cost, it produces a rate |
| Calendar-year method | a method of collecting ratemaking data that estimates both earned premiums and incurred losses by formulas from accounting records |
| Policy-year method | a method of collecting ratemaking data that analyzes all policies issued in a given twelve-month period and that links all losses, premiums and exposure units to the policy to which they are related |
| Accident-year method | 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, & that estimates earned premiums by formulas from accounting records |
| On-level factor | a factor that is used to adjust historical premiums to the current rate level |
| Loss development factor | an actuarial means for adjusting losses to reflect future growth in claims due to both increases in the incurred amount for reported losses and incurred but not reported (IBNR) losses |
| Exponential trending | a method of loss trending that assumes a fixed percentage increase or decrease for each time period. |
| Loss ratio method | a loss reserving method that establishes aggregate reserves for all claims for a type of insurance |
| Basic limit | the minimum amount of coverage for which a policy can be written; usually found in liability lines |
| Catastrophe model | a type of computer program that estimates losses from future potential catastrophic events |
| Credibility | the level of confidence an actuary has in projected losses; increases as the number of exposures unit increases. |
| Credibility factor | the factor applied in ratemaking to adjust for the predictive value of loss data and used to minimize the variations in the rates that result from the rates that result from purely chance variations in losses. |
| Increased limit factor | a factor applied to the rates for basic limits to arrive at an appropriate rate for higher limits |
| Rate charge | an amount over and above the expected loss component of the premium to compensate the insurer for taking the risk that losses may be higher than expected |
| Loss reserve | the liability an insurer carries on its books for future payments on incurred claims |
| Case reserves | represent the estimated loss value of a claim |
| Bulk reserves | exist because insurers cannot identify specific claims with inadequate or excessive case reserves or predict which claims will be reopened. The provisions insurers make for additional reserves |
| Incurred but not reported (IBNR) reserves | a reserve established for losses that reasonably can be assumed to have been incurred but not yet reported. |
| Actuary | a person who uses mathematical methods to analyze insurance data for various purposes, such as to develop insurance rates or set claim reserves |
| Actuarial functions | evaluate the financial consequences of future events; ensuring the insurer operates effectively and conducts its operations in a financially sound basis; ratemaking; estimate unpaid liabilities and loss reserves; predictive modeling; reinsurance needs |
| Ratemaking goals | to develop a rate structure that enables the insurer to compete effectively while earning a reasonable profit on its operations. |
| Characteristics of rates | be stable; be responsive; provide for contingencies; promote risk control; reflect differences in risk exposures |
| Three components of an insurance rate | amount needed to pay future claims and LAE; amount needed to pay future expenses (acquisitions, overhead, taxes); amount for profit and contingencies |
| Two distinct operations of a P&C insurer | Insurance operations and investment operations |
| Factors that affect ratemaking | estimation of losses; delays in data collection and use; change in cost of claims; insurer's projected expenses; target level of profit and contingencies |
| Three rate making methods | pure premium method; loss ratio method; judgment method |
| Two components of insurer's expenses | fixed expenses and variable expenses |
| Ratemaking process | collect data; adjust data; calculate overall indicated rate change determine territorial and class relativities; preate rate filings |
| Three factors determining the experience period | legal requirements; variability of losses over time; credibility of the resulting ratemaking data |
| Types of loss reserves | case reserves; bulk (aggregate reserves) |
Created by:
CHahnCPCU
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