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Ratemaking Is Prospective. Costs. Incurred Losses Allocated Loss Adjustment Expenses Unallocated Loss Adjustment Expenses Commission and Brokerage Other Acquisition Expenses Taxes, Licenses and Fees General Administrative Expenses Policyholder Dividends Underwriting Profit

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Presentation Transcript
slide1

Ratemaking

Is

Prospective

costs
Costs
  • Incurred Losses
  • Allocated Loss Adjustment Expenses
  • Unallocated Loss Adjustment Expenses
  • Commission and Brokerage
  • Other Acquisition Expenses
  • Taxes, Licenses and Fees
  • General Administrative Expenses
  • Policyholder Dividends
  • Underwriting Profit
  • Contingencies
rate indication formula
Rate Indication Formula

LOSS + LAE + FE

1 — VE — U — C

P P P

Loss = Incurred Losses U = Underwriting Profit

LAE = Loss Adjustment Expenses C = Contingencies

FE = Fixed Assets P = Premium

VE = Variable Expenses

slide4

LOSS + LAE + FE

_____________________

  • — VE — U — C

P P P

components of loss reserves
Components of Loss Reserves
  • Case Reserves – Sum of values assigned to specific claims
  • Provision of future development on known (reported) claims – “IBNE”
    • (“IBNE” – Incurred But Not Enough Reported)
  • Reserves for reopened claims
  • Provision for late reported claims – “IBNR”
    • (“IBNR” – Incurred But Not Reported)
  • Provision for claims in transit – “RBNR”
    • (“RBNR” – Reported But Not Reserved, or Not Recorded)

The latter four components are often referred to collectively as “IBNR”

trend
Trend
  • Any index which measures change over time
  • Trend factors may measure monetary inflation, changes in jury attitudes, new laws or legal doctrines, or social changes
types of trend
Types of Trend
  • Claim Frequency (# claims per exposure)
  • Claim Severity (average claim size)
  • Pure Premium (frequency x severity)
  • Premium Base (exposures)
  • Expenses
slide14

LOSS + LAE + FE

_____________________

1 — VE — U — C

P P P

types of expenses
Types of Expenses
  • Loss Adjustment Expenses (LAE)
    • allocated
    • unallocated
    • % of losses vs. % of premium
  • Commission & Brokerage
    • compensation agreements
  • Other Acquisition
  • Taxes, Licenses, & Fees
    • state specific
    • does not include federal income taxes
  • General
slide18

LOSS + LAE + FE

_____________________

1 — VE — U— C

P P P

cost of capital analysis
Cost of Capital Analysis

Economic Foundation:

Investors expect a return that compensates for the

risk associated with the investment opportunity

Judicial Foundations:

Bluefield Waterworks, (U.S. Supreme Court, 1923)

Hope Natural Gas, (U.S. Supreme Court, 1944)

cost of capital analytical methods
Cost of Capital Analytical Methods
  • Comparable earnings
  • Risk premium analysis
    • Capital Asset Pricing Model
  • Discounted cash flow analysis