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Ratemaking ASOPS

Ratemaking ASOPS. By the CAS Committee on Professionalism Education. WHY ASOPs?. As a CAS Member You Are Bound By: Actuarial Standards of Practice (ASOPs) Code of Professional Conduct Statement of Principles Qualification Standards Continuing Education Requirements

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Ratemaking ASOPS

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  1. Ratemaking ASOPS By the CAS Committee on Professionalism Education

  2. WHY ASOPs? • As a CAS Member You Are Bound By: • Actuarial Standards of Practice (ASOPs) • Code of Professional Conduct • Statement of Principles • Qualification Standards • Continuing Education Requirements • As an Actuarial Candidate You Are Bound By: • Code of Professional Ethics for Candidates

  3. How were ASOPs created? CASUALTY ACTUARIAL SOCIETY AMERICAN ACADEMY OF ACTUARIES IS AFFILIATED WITH PROMULGATES HAS FORMED ACTUARIAL STANDARDS BOARD STATEMENTS OF PRINCIPLES ARE USED BY PROMULGATES STANDARDS OF PRACTICE

  4. How to Read an ASOP ASOPs have a consistent format: • Table of Contents • Cover Letter • Section 1: Purpose, Scope, and Effective Date • Section 2: Definitions • Section 3: Analysis of Issues and Recommended Practices • Section 4: Communications and Disclosures • Appendix 1: Background and Current Practices • Appendix 2: Comments/Responses on Drafts

  5. Applicability Guidelines for Actuarial Standards of Practice – As of Dec 2009

  6. Question #1 • True or False: Are the applicability guidelines clear, concise, and complete? • TRUE • FALSE

  7. Answer #1 • True is an Incorrect Answer Press to retake Question #1

  8. Answer #1 • The correct answer is False: • These applicability guidelines should not be considered complete. They are general recommendations and not the final word. Every actuary is bound by every ASOP regardless if it’s on the list for your practice area in the applicability guidelines.

  9. RATEMAKING ACTUARIAL STANDARDS OF PRACTICE • ASOP # 12 Risk Classification (for All Practice Areas) • ASOP # 13 Trending Procedures in Property/Casualty Insurance • ASOP # 25 Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages • ASOP # 29 Expense Provisions in Property/Casualty Insurance Ratemaking • ASOP # 30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking • ASOP # 38 – Using Models Outside the Actuary’s Area of Expertise • ASOP # 39 Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking

  10. Actuarial Standard of Practice # 12 Risk Classification (for All Practice Areas) • 3.2.1 Consider the interdependence of Risk Characteristics and Expected Outcomes (such as cost) • 3.2.2 An established cause and effect relationship is not necessary • 3.2.3 You should select risk characteristics that are capable of being objectively determined • 3.4 Test the Risk Classification System using emerging experience

  11. Question #2 • True or False: An established cause and effect relationship is necessary for ASOP #12 Risk Classification for All Practice Areas • TRUE • FALSE

  12. Answer #2 • True is an Incorrect Answer Press to retake Question #2

  13. Answer #2 • The correct answer is False: • An established cause and effect relationship is not necessary since the task force recognized that there can be significant relationships between risk characteristics and expected outcomes where a cause-and-effect relationship cannot be demonstrated.

  14. Actuarial Standard of Practice # 13 Trending Procedures in Property/Casualty Insurance • 3.1 You should identify the intended purpose or use of the trending procedure: ratemaking, reserving, valuations, underwriting, and/or marketing. • 3.2 The data can consist of historical insurance or non-insurance information. • 3.3 Consider economic and social influences

  15. Actuarial Standard of Practice # 25 Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages • 3.2 Consider various methods of determining credibility. • 3.3 Carefully select related experience to be blended with the subject experience; it should have frequency, severity, or other determinable similar characteristics • 3.4 Informed Actuarial Judgment — The use of credibility procedures is not always a precise mathematical process.

  16. Question #3 • Which statement is not contained in ASOP #13, Trending Procedures in Property/Casualty Insurance, nor ASOP #25, Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages: • A. You should identify the intended purpose or use of the trending procedure: ratemaking, reserving, valuations, underwriting, and/or marketing. • B. Consider various methods of determining credibility. • C. Carefully select related experience to be blended with the subject experience; it should have frequency, severity, or other determinable similar characteristics • D. You should avoid actuarial judgment in favor of a specified mathematical process

  17. Answer #3 • A is an Incorrect Answer Press to retake Question #3

  18. Answer #3 • B is an Incorrect Answer Press to retake Question #3

  19. Answer #3 • C is an Incorrect Answer Press to retake Question #3

  20. Answer #3 • The correct answer is D: • Informed actuarial judgment is requested because the use of credibility procedures is not always a precise mathematical process.

  21. Actuarial Standard of Practice # 29 Expense Provisions inProperty/Casualty Insurance Ratemaking • 3.2 + 3.6 You should determine provisions for projected: • loss adjustment expenses (3.2) • commission and brokerage fees (3.2) • other acquisition expenses (3.2) • general administrative expenses (3.2) • taxes, licenses, and fees (3.2) • provision for residual market and statutory assessments (3.6) • 3.3 + 3.5 + 3.7 You may also: • amortize start-up costs • add provision for policyholder dividends • include the cost of Reinsurance

  22. Actuarial Standard of Practice # 30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking • 3.5 You should consider two elements of investment income: • investment income from insurance operations • investment income on capital • 3.7 You should include a contingency provision if the assumptions used in the ratemaking process produce cost estimates that are not expected to equal average actual costs

  23. Actuarial Standard of Practice # 38Using Models Outside the Actuary’s Area of Expertise • 3.1 You should do all of the following when using models that incorporate specialized knowledge outside of your own area of expertise: • a. determine appropriate reliance on experts; • b. have a basic understanding of the model; • c. evaluate whether the model is appropriate for the intended application; • d. determine that appropriate validation has occurred; and • e. determine the appropriate use of the model.

  24. Question #4 • Which of the following do you NOT need to do when using models that incorporate specialized knowledge outside of your own area of expertise : • A. determine appropriate reliance on experts • B. have a thorough understanding of the model • C. evaluate whether the model is appropriate for the intended application • D. determine that appropriate validation has occurred • E. determine the appropriate use of the model

  25. Answer #4 • A is an Incorrect Answer Press to retake Question #4

  26. Answer #4 • C is an Incorrect Answer Press to retake Question #4

  27. Answer #4 • D is an Incorrect Answer Press to retake Question #4

  28. Answer #4 • E is an Incorrect Answer Press to retake Question #4

  29. Answer #4 • The correct answer is B: • You do not necessarily have to have a thorough understanding of the model; you must have a basic understanding though

  30. Actuarial Standard of Practice # 39Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking • 3.3.1 When using historical insurance data you should: • Consider data applicability • Adjust to reflect future conditions • Modify it to stabilize outcomes and reduce sensitivity • Vary trends where necessary • 3.3.2 You should consider using catastrophe modelsif the available historical data doesn’t represent the exposure

  31. RATEMAKING ACTUARIAL STANDARDS OF PRACTICE • ASOP # 12 Risk Classification (for All Practice Areas) • ASOP # 13 Trending Procedures in Property/Casualty Insurance • ASOP # 25 Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages • ASOP # 29 Expense Provisions in Property/Casualty Insurance Ratemaking • ASOP # 30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking • ASOP # 38 – Using Models Outside the Actuary’s Area of Expertise • ASOP # 39 Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking

  32. CONGRATULATIONS You have successfully completed this session on the Ratemaking ASOPs

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