Actuarial Notes

Exam 5

The Basic Techniques for Ratemaking and Estimating Claim Liabilities is a 4-hour computer-based exam (4.5-hour Pearson VUE appointment) covering Ratemaking and Loss Reserving as part of the ACAS credentialing pathway.

Learning Objectives

A. Ratemaking (45–55%) Candidates should have a thorough understanding of basic Ratemaking so that they can analyze data, select appropriate techniques, and develop solutions to problems.

  1. Define and describe Exposure Bases as used in the ratemaking process
  2. Evaluate and select an exposure base in a given scenario for use in the ratemaking process (e.g., line of business, use cases)
  3. Aggregate and/or organize ratemaking data by: Calendar Year, Policy Year, Accident Year, Report Year, close year, in-force, net of reinsurance; collect written, earned and unearned premium and Earned Exposure
  4. Evaluate ratemaking data and analyses for errors, completeness, and reasonableness
  5. Separate data into groups that balance Homogeneity and Credibility and summarize the considerations for determining such groups
  6. Calculate Loss and Loss Adjustment Expenses for ratemaking (e.g., common ratios such as Frequency, Severity, Pure Premium and Loss Ratio; adjustments to losses such as development and trend; claims-made vs occurrence coverage)
  7. Calculate various adjustments to the premium used for ratemaking (e.g., On Level Premium, On-Leveling via the parallelogram method or extension of exposures, premium audit)
  8. Calculate and apply trends (e.g., Exposure, Premium, Loss) using different approaches (e.g., exponential and linear analyses)
  9. Calculate the underwriting provisions underlying the overall Rate Level Indication (e.g., fixed and variable expenses, the Expense Ratio, profit and contingency, underwriting profit, reinsurance costs); determine indicated Rate Change
  10. Demonstrate proper handling of extraordinary losses for ratemaking purposes (e.g., Large Losses, Catastrophes)
  11. Construct an overall rate level indication using the Pure Premium Method and Loss Ratio Method; calculate a Permissible Loss Ratio
  12. Apply Credibility to ratemaking analyses using different methods and justify choice of complement
  13. Select and justify a final rate change to implement beyond the calculated overall rate level indication (e.g., operational, marketing, regulatory Constraints, Lifetime Value)
  14. Perform calculations related to alternative ratemaking procedures (e.g., classification, territory, deductibles and the Loss Elimination Ratio, Increased Limits and the Limited Expected Value, coinsurance and the Coinsurance Percentage, Commercial Lines Rating mechanisms such as experience, schedule and retrospective rating, self-insured retentions and large deductibles)
  15. Analyze results of predictive models (e.g., Generalized Linear Model)
  16. Apply the four principles of ratemaking to a scenario
  17. Understand the Considerations for Implementing Rates to achieve an organization's goals (e.g., non-pricing solutions, minimum premium, rating algorithms)

Readings:

  • Werner & Modlin
  • CAS Ratemaking Principles
  • ASOP 12
  • ASOP 13
  • ASOP 43

B. Estimating Claim Liabilities (Reserving) (45–55%) Candidates should understand how to estimate Unpaid Claims for both insurance entities and non-insurance entities that retain risk (e.g., self-insureds). See Loss Reserving for the overall framework.

  1. Organize reserving data by: Calendar Year, Accident Year, Policy Year, Underwriting Year, Report Year, etc.
  2. Evaluate reserving data and analyses for errors and reasonableness
  3. Describe the role of Homogeneity and Credibility of data in the process of estimating unpaid claims
  4. Describe the fundamentals of different Types of Insurance (e.g., long tail vs. short tail lines, low frequency vs. high frequency lines, occurrence vs. claims made)
  5. Articulate the importance of accurate estimates of unpaid claims
  6. Build and analyze Development Triangles (e.g., paid and reported loss, Case Reserves, count, Allocated Loss Adjustment Expense (ALAE)); select age-to-age factors and Cumulative Development Factors
  7. Apply a Tail Factor
  8. Use development triangles as diagnostic tools to identify changes and development trends (e.g., claim count, Severity, Severity Analysis, ratio of losses to premium, ratios of loss and claim counts)
  9. Calculate and evaluate unpaid loss estimation techniques (i.e., Chain Ladder Method, case outstanding development, Expected Loss Method, Bornhuetter-Ferguson Method, Cape Cod Method, frequency-severity, Berquist-Sherman, Benktander Method); estimate IBNR and Ultimate Loss
  10. Assess the influence of operating changes on the estimation of unpaid losses (e.g., claims coding and/or claim-related expenses, claims processing, underwriting and policy provisions, marketing, reinsurance, treatment of recoveries such as deductibles and salvage and subrogation)
  11. Adjust data and/or estimation techniques for changes in the internal and external environment (e.g., claims processes that result in shift in the adequacy of case outstanding or shift in settlement rates, change in mix of business, change in rate level, inflationary or legal environment)
  12. Consider the impact of and adjust for the presence of large losses in a reserving analysis
  13. Calculate and evaluate the estimation techniques for recoveries (e.g., Salvage and Subrogation, reinsurance)
  14. Calculate and evaluate the estimation techniques for Allocated Loss Adjustment Expenses
  15. Calculate and evaluate the estimation techniques for Unallocated Loss Adjustment Expenses
  16. Evaluate the results of a reserve analysis for adequacy and reasonableness using loss ratios, severities, pure premiums, frequencies, indicated unpaid losses, etc.
  17. Monitor results for adequacy and reasonability including interim valuations (e.g., actual versus expected, roll forward analysis)
  18. Communicate results and drivers of change to various stakeholders (internal management, investors, regulators)
  19. Define and apply Reinsurance concepts to calculate net, ceded, and gross losses
  20. Utilize external information in a reserve analysis (e.g., inflation, tort reform, attorney involvement)

Readings:

  • Friedland
  • ASOP 43

Source Material

Source Material

  • Basic Ratemaking (Werner - 2016)
    • A1–A15, A17–A18
  • Estimating Unpaid Claims Using Basic Techniques (Friedland - 2010)
    • B1–B20
  • ASOP 12 - Risk Classification (ASB - 2005)
    • A4–A5
  • ASOP 13 - Trending Procedures in Property Casualty Insurance (ASB - 2009)
    • A4, A8
  • ASOP 43 - Property Casualty Unpaid Claim Estimates (ASB - 2007)
    • A4, B2
  • Statement of Principles Regarding Property and Casualty Insurance Ratemaking (CAS - 1988)
    • A4, A16