CPCU 520 – Chapter 7: Actuarial Operations

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Ratemaking
• 𝐼𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝐿𝑜𝑠𝑠𝑒𝑠 = 𝑃𝑎𝑖𝑑 𝐿𝑜𝑠𝑠𝑒𝑠 + 𝐿𝑜𝑠𝑠 𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠
• 𝐸𝑎𝑟𝑛𝑒𝑑 𝐶𝑎𝑟 𝑌𝑒𝑎𝑟𝑠 = (𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑎𝑟𝑠) × (𝑌𝑒𝑎𝑟𝑠 𝑜𝑓 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒)
𝐼𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝐿𝑜𝑠𝑠𝑒𝑠
• 𝑃𝑢𝑟𝑒 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = 𝐸𝑎𝑟𝑛𝑒𝑑 𝐶𝑎𝑟 𝑌𝑒𝑎𝑟𝑠
• Pure Premium Ratemaking Method:
𝐼𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝐿𝑜𝑠𝑠𝑒𝑠
o 𝑃𝑢𝑟𝑒 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = 𝐸𝑎𝑟𝑛𝑒𝑑 𝐶𝑎𝑟 𝑌𝑒𝑎𝑟𝑠
𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
o 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑝𝑒𝑟 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒 𝑢𝑛𝑖𝑡 = 𝐸𝑎𝑟𝑛𝑒𝑑 𝐶𝑎𝑟 𝑌𝑒𝑎𝑟𝑠
o 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒 =
𝑃𝑢𝑟𝑒 𝑃𝑟𝑒𝑚𝑖𝑢𝑚+ 𝐹𝑖𝑥𝑒𝑑 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑝𝑒𝑟 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒 𝑢𝑛𝑖𝑡
1−𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠− 𝑃𝑟𝑜𝑓𝑖𝑡 & 𝐶𝑜𝑛𝑡𝑖𝑛𝑔𝑒𝑛𝑐𝑖𝑒𝑠 𝐹𝑎𝑐𝑡𝑜𝑟
• Loss Ratio Ratemaking Method:
𝐼𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝐿𝑜𝑠𝑠𝑒𝑠
o 𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑜𝑠𝑠 𝑅𝑎𝑡𝑖𝑜 = 𝐸𝑎𝑟𝑛𝑒𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
o 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐿𝑜𝑠𝑠 𝑅𝑎𝑡𝑖𝑜 = 100% − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 𝑃𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛
 Expense Provision includes Profit & Contingences in this
method
𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑜𝑠𝑠 𝑅𝑎𝑡𝑖𝑜−𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐿𝑜𝑠𝑠 𝑅𝑎𝑡𝑖𝑜
o 𝑅𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐿𝑜𝑠𝑠 𝑅𝑎𝑡𝑖𝑜
• On-level Premium Adjustments
o Rate Level Index
 The rate level index in Year 1 (i.e. the earliest year) will always
be 1.00
 For Years 2 and subsequent:
𝑅𝑎𝑡𝑒 𝐿𝑒𝑣𝑒𝑙 = (𝑃𝑟𝑖𝑜𝑟 𝑌𝑒𝑎𝑟 ′ 𝑠 𝑅𝑎𝑡𝑒 𝐿𝑒𝑣𝑒𝑙 𝐼𝑛𝑑𝑒𝑥) × (1 +
𝑟𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑓𝑟𝑜𝑚 𝑡ℎ𝑒 𝑝𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟)
𝑀𝑜𝑠𝑡 𝑟𝑒𝑐𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 ′ 𝑠 𝑟𝑎𝑡𝑒 𝑙𝑒𝑣𝑒𝑙 𝑖𝑛𝑑𝑒𝑥
o 𝑂𝑛𝑙𝑒𝑣𝑒𝑙 𝐹𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑌𝑒𝑎𝑟 𝑖 = 𝑅𝑎𝑡𝑒 𝐿𝑒𝑣𝑒𝑙 𝐼𝑛𝑑𝑒𝑥 𝑓𝑜𝑟 𝑌𝑒𝑎𝑟 𝑖
o 𝑂𝑛𝑙𝑒𝑣𝑒𝑙 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑒𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 × 𝑂𝑛𝑙𝑒𝑣𝑒𝑙 𝐹𝑎𝑐𝑡𝑜𝑟
𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑒𝑑 𝐿𝑜𝑠𝑠𝑒𝑠
o 𝑂𝑛𝑙𝑒𝑣𝑒𝑙 𝐿𝑜𝑠𝑠 𝑅𝑎𝑡𝑖𝑜 = 𝑂𝑛𝑙𝑒𝑣𝑒𝑙 𝑃𝑟𝑒𝑚𝑖𝑢𝑚-
CPCU 520 – Chapter 7: Actuarial Operations

• Claim Severity Trend Calculation

𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑒𝑑 𝐿𝑜𝑠𝑠𝑒𝑠
o 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑙𝑎𝑖𝑚 𝑆𝑒𝑣𝑒𝑟𝑖𝑡𝑦 = 𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑒𝑑 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑙𝑎𝑖𝑚𝑠

Reserving
𝐿𝑜𝑠𝑠𝑒𝑠 𝑎𝑠 𝑜𝑓 24 𝑚𝑜𝑛𝑡ℎ𝑠
• 12 𝑡𝑜 24 𝑚𝑜𝑛𝑡ℎ 𝑎𝑔𝑒 𝑡𝑜 𝑎𝑔𝑒 𝑓𝑎𝑐𝑡𝑜𝑟 = 𝐿𝑜𝑠𝑠𝑒𝑠 𝑎𝑠 𝑜𝑓 12 𝑚𝑜𝑛𝑡ℎ𝑠

• 𝐹𝑎𝑐𝑡𝑜𝑟 𝑡𝑜 𝑈𝑙𝑡𝑖𝑚𝑎𝑡𝑒 =
(12 𝑡𝑜 24 𝑚𝑜𝑛𝑡ℎ 𝑎𝑔𝑒 𝑡𝑜 𝑎𝑔𝑒 𝑓𝑎𝑐𝑡𝑜𝑟) ×
(24 𝑡𝑜 36 𝑚𝑜𝑛𝑡ℎ 𝑎𝑔𝑒 𝑡𝑜 𝑎𝑔𝑒 𝑓𝑎𝑐𝑡𝑜𝑟) ×
(36 𝑡𝑜 48 𝑚𝑜𝑛𝑡ℎ 𝑎𝑔𝑒 𝑡𝑜 𝑎𝑔𝑒 𝑓𝑎𝑐𝑡𝑜𝑟 ) × …
• 𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝑈𝑙𝑡𝑖𝑚𝑎𝑡𝑒 𝐿𝑜𝑠𝑠𝑒𝑠 =
𝐼𝑛𝑐𝑢𝑟𝑟𝑒𝑑 (𝑜𝑟 𝑃𝑎𝑖𝑑) 𝐿𝑜𝑠𝑠𝑒𝑠 × 𝐹𝑎𝑐𝑡𝑜𝑟 𝑡𝑜 𝑈𝑙𝑡𝑖𝑚𝑎𝑡𝑒