Chapter 7 - C 120

Terms	Definitions
Explain the concept of an insurer's "bucket of premium."	it is the sum of the pure premium and expenses, including development factors, trend factors, acquisition costs, administrative expenses and profit.
What is the difference between development factors and trend factors?	development factors are adjustments to current reserves for claims yet to be settled while trend factors are applied to all losses to reflect what they would probably cost if they occurred again next year.
What are acquisition costs? What might these costs include?	acquisition costs are incurred by the insurer to conclude a contract of business with a policyholder. they may include commission, advertising or promotional expenses.
What is underwriting profit?	profit that arises out of insurance operations. the amount by which earned premiums exceed the cost of incurred claims and expenses.
What is investment income?	income earned from investing unearned premium money.
What is the difference between the rate and the premium for an insurance policy?	a rate is the price of a unit of insurance for the policy period. A premium is the total cost of the insurance.
What are the major components of a rate?	the anticipated cost of settling claims, the acquisition costs of the business such as commissions and the cost of administering the process, taxes levied on the premiums
What are the TWO (2) conditions for rate adequacy?	the actuarial forecast of future losses based on past losses must be accurate, the sample represented by the book of business written by a particular underwrite or insurer must be representative of the population.
Why is the size of a rating class important? What other important characteristics should a rating class have?	it should be large enough to allow a reasonable amount of data to be collected for it. if its too small it will lack statistical credibility. it should also reflect a reasonable level of discrimination among insureds to insure that it reflects the probably frequency and severity of loss.
What is the exposure base of a risk? Ideally, what should it reflect?	it is the denomination in which the unit of exposure is express. e.g. gross sales.
How do most insurers gather statistics about loss experience?	many insurers report their loss stats to the Insurance Bureau of Canada. IBC-member companies provide more than 95% of the private/public general insurance sold.
Explain the law of large numbers and the theory of probability.	law of large numbers - the probability becomes more reliable the larger the number of trials. theory of probability - the likelihood of an occurrence, the ratio of the number of actual occurrences to the number of possible occurrences.
How is the premium rate, or unit cost, of insurance calculated?	it is calculated by dividing the total premium by the exposure unit.
Describe the general process for all ratemaking.	the process where underwriters apply the rates developed by actuaries to the information that underwriters have gathered to determine premium for individual risks.
What does a manual rate represent? Explain.	represents the price that is deemed to be appropriate for the "average" risk in that class. it is taken from a large body of data.
What is class rating? When is it used?	when computers carry out the rating function automatically for certain classes of insurance. e.g. auto. It is used when stats can be gathered on a large number of risks that share common characteristics.
What is schedule rating? When is it used?	some classes of businesses are individually rated based on their complexity and the need for underwriting judgement. It is used when statistical data is too fragmented to permit class rating.
Explain the process of fixing and modifying the base rate of insurance.	the base rate is used as an initial charge to apply to the particular community. once rates are determined, debits and credits are applied based on factors that make the risk either better or worse than the average risk of its type.