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Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009. Property and Casualty Insurance Ratemaking Committee - update Blair Manktelow Shams Munir. 2009 Seminar for the Appointed Actuary

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2009 seminar for the appointed actuary colloque pour l actuaire d sign 2009

Canadian

Institute

of

Actuaries

L’Institutcanadien

des

actuaires

2009 Seminar for the Appointed Actuary

Colloque pour l’actuaire désigné 2009

slide2
Property and Casualty Insurance Ratemaking Committee - update

Blair Manktelow

Shams Munir

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

status update
Status Update

Exposure draft is not yet approved by the ASB

ASB meeting later this month to hopefully approve

60-day comment period once released

Revisions will be incorporated

Final version hopefully approved in 2010

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

definitions page 1 of 2
Definitions (page 1 of 2)

Credibility is a measure of the predictive value attached to an estimate based on a particular body of data

Credibility procedure is the blending of information from the subject experience with information from one or more sets of related experience

Indicated rate is the best estimate of the premium rate to be charged to the insured

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

definitions page 2 of 2
Definitions (page 2 of 2)

Related experience includes premiums, claims, expenses, and other relevant data for coverage analogous to the coverage under consideration other than the subject experience and may include established rate levels or differentials or external data

Subject experience includes premiums, claims, exposures, expenses, and other data relevant to the coverage under consideration

Trending is the process of evaluating how changes over time affect a variable, and adjusting projected estimates of that variable to levels that are anticipated for the forecast period

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

scope page 1 of 3
Scope (page 1 of 3)

Apply to property and casualty insurance;

that is, insurance to possessors of tangible or intangible property for costs arising from loss of or damage to such property (e.g. fire, fidelity, marine hull, warranty, and title insurance), and insurance to individual or other legal persons, for costs or damages to others arising from the actions of such persons (e.g. liability and mortgage loan insurance and surety bonds) and for costs arising from injury to such persons (e.g. automobile accident benefits insurance)

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

scope page 2 of 3
Scope (page 2 of 3)

Standards do not apply to public personal injury compensation plans

Apply to the derivation of indicated rates for P&C insurance. May also provide useful guidance for the derivation of indicated rates for enterprises that are not incorporated insurers

Do not apply to the selection of rates

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

scope page 3 of 3
Scope (page 3 of 3)

Ratemaking is generally prospective because the indicated rate is usually developed prior to the transfer of risk

Indicated rate provides for all costs so that the insurance system is financially sound

Equity across insureds is maintained by providing for the costs of an individual risk transfer. An indicated rate from aggregate experience of similar risks is an estimate of the cost of the risk transfer for each individual in the class

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

methodology
Methodology

For an insurance coverage to be provided over a specified period of time, the actuary should derive an indicated rate such that the present value of the future cash flows relating to the expected revenue at the indicated rate equals the present value of the future cash flows relating to the corresponding expected claim costs, expense costs, and provision for profit.

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

methodology sub sections
Methodology – sub sections

Data

Changes in Risk

Claim Development

Trending

Experience adjustments

Credibility

Expenses

Provision for Profit

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

data methodology
Data (Methodology)

Identify the source & time period covered by the data

Assess the relevance, appropriateness, and sufficiency of the data

Assess the quality (accuracy, reliability) of the data

Understand the general characteristics, format and content of the data

Gain familiarity with the system & transactions that record the data

Gain familiarity with the general contractual terms and benefits provided by the insurance coverage

Check or reconcile the data for consistency

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

changes in the risk methodology
Changes in the Risk (Methodology)

Reflect factors that were or are largely under the control of the insurer, such as

underwriting standards or methods,

case reserve setting standards and practices,

claims management policies and practices,

the mix or type of business written,

reinsurance arrangements, and

insurance product policy wordings, benefits or coverage

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

changes in the risk methodology1
Changes in the Risk (Methodology)

Reflect factors that are largely outside the control of the insurer, such as

legislated coverages or benefits,

the economy,

the social environment,

the political environment, and

the legal environment

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

claim development methodology
Claim Development (Methodology)

The actuary:

would subdivide the data in an appropriate fashion by length of time period (year, half year, or quarter year) AND time intervals grouping (e.g., by accident period, policy period, or calendar period),

avoid groups whose data are too sparse for reasonable analysis AND would subdivide the data into reasonably homogeneous sub-groups of similar types of claims

would select the experience period of the data to project ultimate claims with reasonable reliability,

might include analysis of related experience

might include appropriate adjustments to the data to restate them to remove the effect of intervening changes within the insurance environment

would select appropriate methods to estimate the ultimate claim costs

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

trending methodology
Trending (Methodology)

Applies to claims, premiums and exposure trending

Considerations subdivided between considerations relating to selection, subdivision and analysis of data

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

trending methodology1
Trending (Methodology)

Selection of Data

availability, degree of accuracy and homogeneity of the data, and

relevance of the data (i.e., similarity to the jurisdiction, coverage and/or sub coverage, kind of loss, company, etc. for which the indicated rate is being derived)

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

trending methodology2
Trending (Methodology)

Subdivision of the Data

categorizing the data into time intervals AND time intervals groupings, weighed against any resulting loss of data stability or responsiveness,

categorizing the data into separate components weighed against any possible masking of underlying correlations

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

trending methodology3
Trending (Methodology)

Analysis of the Data

changes in the underlying risk

Credibility

Seasonality

Time interval

length of the experience period

length of the forecast period

economic, social, demographic, or environmental influences

trending procedures established by precedent or common usage or performed in previous analyses

the use of mathematical models to identify and extrapolate trends; the success of the model in making prior projections, and the statistical goodness of fit of the model to the data

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

trending methodology4
Trending (Methodology)

Analysis of the Data (continued)

fluctuation in the data points, the relative weights given to each data point and changes in historical patterns

uncertainty surrounding the estimated ultimate values of the data

the degree to which past trend patterns may or may not be reflective of future trend patterns

reasonableness of the results produced by the analysis

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

experience adjustments methodology
Experience Adjustments (Methodology)

To remove biases and distortions in the experience from

Impact of large & catastrophic claims

Regulatory or legislative changes

Seasonality

Reinsurance recoveries

Changes in the mix of business

Changes in underwriting rules

Shifts in the distribution of rating variables

Data errors

Changes in rate level

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

credibility methodology
Credibility (Methodology)

Considerations:

various actuarial methods for determining credibility

generally accepted practices

homogeneity of the subject experience and the related experience

relevance of the related data

independence of the subject experience and the related experience

biases that may exist in the credibility method or related data used

practicality of application

availability of data

predictive power of the estimation procedure

reasonableness of results

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

expenses methodology
Expenses (Methodology)

May be specified

Comprises all costs other than claim costs & profit, including

Claim adjustment expenses

Commissions & Other Acquisition Expenses

General Administration

Policyholder Dividends

Reinsurance Costs

Residual Market Expenses

Statutory Assessments, Taxes, Licenses and fees

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

expenses methodology1
Expenses (Methodology)

Considerations

past expenses

changes in conditions that may cause past expenses not to be reflective of future expenses

changes that may have occurred in the way expenses are measured

one-time expenses and whether or not such expenses would be amortized

whether expenses that are not, by their nature, directly proportional to premium would be imputed on a per policy, per coverage, percentage of claim costs, or per unit of exposure basis

whether expenses vary based on the distribution system

whether expenses vary between new and renewal policies

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

profit provision methodology
Profit Provision (Methodology)

Silent on considerations

This profit provision is not the same as what is commonly referred to as underwriting profit

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

reporting
Reporting

Currently no standard reporting language other than in certain automobile rate filings. If required these could be used.

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

standard reporting language
Standard Reporting Language

actuary responsible for all assumptions:

I have prepared the indicated rate[s], or range of indicated rate[s], on behalf of [official name of “insurer”], for the following insurance coverage[s]: [name of coverage(s)].

I have derived the indicated rate[s], or range of indicated rate[s], to be effective [Month XX, 20XX] for new business and [Month XX, 20XX] for renewal business.

In my opinion, the indicated rate[s], or range of indicated rate[s], has [have] been calculated in accordance with accepted actuarial practice in Canada.

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

modified reporting language
Modified Reporting Language

actuary does not take responsibility for all assumptions:

I have prepared the indicated rate[s], or range of indicated rate[s], on behalf of [official name of “insurer”], for the following insurance coverage(s): [name of coverage(s)].

I have derived the indicated rate[s], or range of indicated rate[s], to be effective [Month XX, 20XX] for new business and [Month XX, 20XX] for renewal business.

In my opinion, the indicated rate[s], or range of indicated rate[s], has [have] been calculated in accordance with accepted actuarial practice in Canada.

However, I have not taken responsibility for the following assumptions as stipulated by the terms of the engagement:

(A listing of assumptions for which the actuary does not take responsibility would follow.)

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

slide28
Property and Casualty Insurance Ratemaking Committee :

Blair Manktelow

Shams Munir

Ron Miller

Ted Zubulake

Jean-Francois Larochelle

Mylene Labelle

Betty-Jo Walke

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009