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Ratemaking Is Prospective

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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Ratemaking Is Prospective

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  1. Ratemaking Is Prospective

  2. 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

  3. 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

  4. LOSS + LAE + FE _____________________ • — VE — U — C P P P

  5. Incurred Losses = Paid Losses + Loss Reserves

  6. 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”

  7. 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

  8. Types of Trend • Claim Frequency (# claims per exposure) • Claim Severity (average claim size) • Pure Premium (frequency x severity) • Premium Base (exposures) • Expenses

  9. LOSS + LAE + FE _____________________ 1 — VE — U — C P P P

  10. 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

  11. LOSS + LAE + FE _____________________ 1 — VE — U— C P P P

  12. 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)

  13. Cost of Capital Analytical Methods • Comparable earnings • Risk premium analysis • Capital Asset Pricing Model • Discounted cash flow analysis

  14. Credit Score v. Insurance Score

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