MATH3806 – Topics in General Insurance

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1. Internal Data:

• Data requirements depend on the type of ratemaking analyses being done.

• For example, it is not essential to know the individual characteristics for each policy or

risk to perform an analysis of the adequacy of the overall rates for a given product.

• On the other hand, a full multivariate classification analysis requires significant historical

detail about each item being priced.

• Typically performed on existing products and uses historical data to project future

profitability.

• External data may be used as a benchmark.

• Two types of internal data involved, risk information and accounting information.

• Risk information includes exposures, premium, claim counts, losses, etc.

• Accounting information includes underwriting expenses and ULAE, etc.

• Data retrieval methods vary between companies.

• Some actuaries have access to a data mart for this type of information.

• Other actuaries have access to general databases and are able to manipulate the

information to be usable.
#2

A policy database is a structured set of data defined according to specific records and fields. The

records can be individual policies or further subdivision of the policy. The fields can be any

explanatory information about the records. The way a record is defined for a particular product’s

policy database depends on the exposure measure and the way the premium is calculated.

Examples of data include: Policy Identifier, Risk Identifiers, Relevant Dates, Premium, Exposure

and Characteristics.
Q3: SAME AS 2 BUT FOR CLAIMS DATABASE, GIVE 10 EXAMPLE OF DATA.

● Claim data, also referred to as administrative data, are forms of an electronic record.
This type of database generally represents a transaction tied to a specific claim. The
fields or the records contain dates or other explanatory information with respect to that
claim. This type of database involves multiple coverages or causes of loss which may be
represented as separate records or indicator fields. Examples of this field or records are:

1. Policy identifier: This type of identification varies in companies, however, it used

to identify the different types of agreements made between the company and its
clients.

2. Claim identifier: The claim database contains a unique identifier for each specific
claim. This same identifier is used if the claim has multiple claim transaction
records.

3. Claimant identifier: The claim database contains a unique identifier for each
specific claimant on a particular claim.

4. Relevant loss dates: This includes fields for the date of loss for the insurance
claim or when the damage occurred. The report date and the date of the
transaction for the specific record are also written down.

5. Claim status: This type of field/ record is used to track the status of the claim.
The claims can be open/active and if closed they can be reopened. In the event
they are re-open, the status of that claim may be labeled as “reopened” or
“re-closed”

6. Claim count: This refers to the number of claims incurred by coverage associated
with the loss occurrence. Alternatively, if each record or a collection of records
defines a single claim by coverage, aggregating claim counts can be
accomplished without this explicit field.

7. Paid loss: This field captures the payments made for each claim record. Multiple
coverages, perils, or the loss payments can be tracked in separate fields or
records. If a product is suspected to cause catastrophic losses then payments
are tracked separately either through a separate record or an indicator included
on the record.

8. Case reserve: This field includes the case reserve or the change in the cash
reserve at the time the transaction is recorded. Similarly, case reserve is
recorded in separate fields or records by coverage, peril, and by catastrophe or
non-catastrophe claim, if applicable.
9. Allocated loss adjustment expenses: Allocated loss adjustment expenses (ALAE)
are expenses that can be assigned to a specific claim and are included in the
claim database. If ALAE can be subdivided into finer categorization, additional
fields may be used accordingly. Unallocated loss adjustment expenses (ULAE)
cannot be assigned to a specific claim and are handled elsewhere. As with
losses, this is captured separately by coverage or peril and by catastrophe or
non-catastrophe, if applicable.

10. Claim characteristics: Companies may collect characteristics associated with the
claims (e.g., type of injury, physician information). It is important to note that while
studying the impacts of these characteristics on average claim size may be
interesting for certain purposes (e.g., loss reserve studies).
4. What is Salvage?

➢ When a company replaces damaged property, the company may claim the damaged

property and use it to recoup any losses made by the claim by reconditioning and selling

it.
#5

Subrogation is the legal right held by insurance companies to recover any damages from a third

party who contributed fault to the loss event or more specifically it is the right to recover the

amount of the claim paid by the insurance company to the insured for the loss by legally

pursuing the third party that caused the insurance loss.

#6. WRITE SHORT NOTES ON ACCOUNTING INFORMATION`

Accounting Information

These are the data that is required for rate-making but isn't specific to any one policy. These data

usually takes the form of an expense and include

- Underwriting expenses

- Loss Adjustment Expenses

- Allocated Loss Adjustment Expenses

- Unallocated loss adjustment Expenses

Q7: NAME THE THREE (3) GENERAL OBJECTIVES WHEN AGGREGATING DATA FOR
RATEMAKING.

● Ratemaking analyses require aggregating data on a large scale for policy, claim, and
accounting databases. When determining changes in the overall rate level and setting
prices for large commercial accounts, claim data are typically aggregated by the line of
business and year.
● When aggregating data for ratemaking purposes, three general objectives apply:
1. Accurately match losses and premiums for the policy.
a. This avoids overstating the company’s underwriting profit.
b. It ​helps ensure that the profit reported is accurate.
c. It may consist of matching earned premium remaining after losses have been
paid and administrative expenses have been deducted.

2. Use the most recent data available.

a. Companies are better able to estimate risk and customer behavior.
b. It can narrow in on accurately pricing premiums that maximize profit and meet
demand while responding to competitive pressure
c. It gives actuaries time to work on more growth-producing activities.

3. Minimize the cost of data collection and retrieval.

a. It is very crucial that businesses keep this cost low to adequately maintain the
flow of operations on a daily basis.
#8 Define calendar year, accident year, policy year and report year

methods of aggregation of data. Give the advantages and disadvantages

of each method.

Calendar Year

Calendar year Considers all premiums that occur during a twelve-month calendar year. This

method disregards the date of policy issue, the accident date or the report of a claim. Calendar

year premiums and exposures refer to all the premium and exposures earned during that twelve-

month period. As a result, all the premiums and exposures are fixed at the end of the year.

Similarly, calendar year paid losses disregards date of occurrence or report date for paid losses.

Reported losses for the calendar year are equal to paid losses plus the change in cases reserves

during the twelve-month calendar year. At the end of the year reported losses are fixed.

The advantage of calendar year aggregation

Data is available quickly as the calendar year ends. This information is required for other

financial reports. This poses no additional expenses to aggregate data this way for rate-making

purpose.

The disadvantage of calendar year aggregation

Mismatch in timing between premiums and losses. premiums come from policies in that year.

Losses might come from payments and reserve changes from years ago
Accident year

Considers losses for accidents that have occurred during a twelve-month period regardless of

when the policy was issued, or the claim reported. Accident year paid losses includes only the

loss payments that have occurred during the year. Similarly, reported losses for accident year

consists of loss payments made plus case reserves only for those claims that occurred during the

year. At the end of the year, reported losses often change as additional claims are reported,

claims are paid, or reserves are changed.

The advantage of accident year aggregation

Premiums and losses are better matched than that of calendar year aggregation. Losses on

accidents occurring during the year are compared to premium earned on polices during the same

year.

The disadvantage of accident year aggregation

Since accident year is not fixed at the end of the year, future development on the known losses

need to, therefore, be estimated.

Policy year

Considers all premium and loss transactions on policies that were written during a twelve-month

period, regardless of when the claim occurred or when it was reported, reserved, or paid. ALL

premium and exposures earned on policies written during the year are considered part of that

policy year's earned premium and earned exposures. Premiums and exposures are not fixed until

after the expiration date of all policies written during the year. Policy year paid losses includes

payments made on those claims covered by policies written during the year. Similarly, reported
losses for the policy year consists of payments made plus case reserves only for those claims

covered by policies written during the year. At the end of the policy year, losses can and often do

change as additional claims occur, claims are paid, or reserves are changed.

The advantage of policy year aggregation

Policy year aggregation represents the best match between losses and premium. Losses on

policies written during the year are compared with premium earned on those same policies.

The disadvantage of policy year aggregation

Data takes longer to develop than both calendar year and accident year. As policy year exposures

are not fully earned until after the end of the year.

Report Year

Losses are aggregated according to when the claim was reported, as opposed to when he claims

occurred.

The advantages of report year aggregation

Useful for commercial line products.

The disadvantages of report year aggregation

Not particularly useful for individualized policies.

9. External Data:
• Useful to supplement internal data when pricing new or existing products.
• Commonly used statistical plan data, other aggregated insurance industry data,
competitors’ rate filings, and third-party data unrelated to insurance.

Statistical Data
• In the U.S., property and casualty insurance is regulated at the state level.
• Regulators typically require companies to file statistical data in a consistent format.
• Typically, detailed data is not necessary and is usually summary based.
• Benchmark rates determined based on statistical data provided by insurance companies.
• To comply with requirements for writing industry data, certain organizations have been
formed to collect and aggregate data to collect from participating companies writing the
same product.
• For example, the National Council for Compensation Insurance (NCCI) and Insurance
Services Office, Inc (ISO).
• These plans collect mainly transactional data.
• State regulators may initiate ad hoc data calls to address a specific need.
• This information is publicly available and can be a good source of additional ratemaking
information for companies.

Other Aggregated Industry Data

• Many insurance companies voluntarily report data to various organizations so that it can
be aggregated and used by the insurance industry and other parties.

Competitor Rate Filings/Manuals

• Rate filings usually include actuarial justification for requested rate changes and the
manual pages needed to rate a policy.
• Even the simplest filings such as a simple rate change may include helpful information.
• However, complex filings with multiple variable changes may include helpful
information as it pertains to the relationships between them.
• Manual pages may also be required.
• This information may be used to estimate the overall average premium level charged by
the company and the differences due to characteristic changes.
• Companies only file the pages relating to the changes.
• Underwriting tiers are often created.
• Most jurisdictions do not require companies to file underwriting data
• The rating manual without underwriting is incomplete information.
• A company must take care in using another’s rating manual as each company is different
in several ways.

Other Third-Party Data

• Not necessarily specific to insurance.
• Data such as CPI may be useful in determining price levels and risks.
• Geo-Demographic data may also be used when determining how risky an area is.
• Credit data is also a major risk factor.
• Other examples include:
▪ Personal automobile insurance: vehicle characteristics, department of motor
vehicle records
▪ Homeowners insurance: distance to fire station
▪ Earthquake insurance: type of soil
▪ Medical malpractice: characteristics of hospital in which doctor practices
▪ Commercial general liability: type of owner (proprietor, stock)
▪ Workers compensation: OSHA inspection data.