ch9 doubts

keshav1996keshav1996
in W-09-RiskClassification
  1. Underwriting variables may be used to guide risk selection decisions, but could also guide risk placement decisions. In some cases, placing a risk into a different company or tier may affect the rate (though the criteria are not considered “rating variables” by regulators). What does the statement mean?
  2. Fall 2017 (Q9) part a.--> Can't we use AGE as exposure base because firstly, age relates to experience and experience to prob of causing losses, and secondly, the data on nurses' age is easy to obtain and verify?
  3. Did not understand the following statement at all: "The pure premium for each level is based on the experience of each level, and assumes a uniform distribution of exposures across all other rating variables. To the extent that one territory may have a disproportionate number of exposures of high or low amount of insurance homes, this assumption is violated. By ignoring this exposure correlation between territory and amount of insurance, the loss experience of high or low amount of insurance homes can distort the indicated territorial relativities resulting in a “double counting” effect." And thus the drawback of PP approach too. You may wish to use the Fall 2014 (Q11) part b.as an example to explain me the concept of how exposure correlation and double counting effect works.
  4. How is the Loss Ratio method giving the change in indicated relativity? In the chapter on Indication (Ch-8), it was quite clear because the PP method gave a $ amount while LR method gave a %age. But, not able to relate here.
  5. what does the following statement mean--> "If a shock loss in a territory is not excluded from relativity analysis, the indicated rel will be higher in years with shock losses and lower in years without shock losses"


Thanks.

Comments

  • GrahamGraham
    edited March 2021

    Question 1: Underwriting variables may be used to guide risk selection decisions, but could also guide risk placement decisions. In some cases, placing a risk into a different company or tier may affect the rate (though the criteria are not considered “rating variables” by regulators). What does the statement mean?

    • I can answer your question more effectively if you are more specific with your question. This quote is a compound statement and it isn't really enough to simply say that you don't understand it. There are several things going on and it's more efficient if you can specify more precisely what you don't understand, and maybe give me some hint of your current understanding so I know better what to address in my answer.
    • Also, I realize this quote came from the bottom of page 158 in Werner but in general you should reference the quote so I know where it's coming from.


  • keshav1996keshav1996

    Hi Graham,

    I am sorry for not being more specific and yes, it is one of the example in Werner under legal criteria for assessing a rating variable. Actually, I am not able to understand the statement/example at all. So, the best I could do was to just copy and paste it here.

    I lost it after the text said that regulators may not permit some factors to be used in rating algorithm but allow them to be used while underwriting. What are ‘risk placement’ placement decisions and then the statement I quoted above.

    Thanks.

  • GrahamGraham

    Question 2: Fall 2017 (Q9) part a.--> Can't we use AGE as exposure base because firstly, age relates to experience and experience to prob of causing losses, and secondly, the data on nurses' age is easy to obtain and verify?

    • Age and gender are not good choices for an exposure base because causality is not clear. For example, a more experienced nurse may be given more complex tasks which may actually increase the risk of loss. You would likely not have received credit by answering age or gender.
    • Hours worked and number of employees are by far the best choices because causality is much clearer, and they also satisfy other criteria of a good exposure base.

    Question 3: Did not understand the following statement at all: "The pure premium for each level is based on the experience of each level, and assumes a uniform distribution of exposures across all other rating variables. To the extent that one territory may have a disproportionate number of exposures of high or low amount of insurance homes, this assumption is violated. By ignoring this exposure correlation between territory and amount of insurance, the loss experience of high or low amount of insurance homes can distort the indicated territorial relativities resulting in a “double counting” effect." And thus the drawback of PP approach too. 

    • Same comment as for Question 1. I can answer your question more effectively if you can be more specific about what you don't grasp.
    • For example, let's take the first phrase of the first sentence: The pure premium for each level is based on the experience of each level. I'm going to assume that you understand that. You can still quote the whole paragraph but you should go phrase by phrase and let me know specifically where you are getting lost.
    • If you break the paragraph down into pieces like that, you will probably find you understand more than you think. And if there are still parts you don't understand, you will be more clear yourself on exactly which parts in particular are giving you trouble.


  • GrahamGraham

    Question 1 (version 2): I lost it after the text said that regulators may not permit some factors to be used in rating algorithm but allow them to be used while underwriting. What are ‘risk placement’ placement decisions and then the statement I quoted above.

    • Underwriting refers to the decision whether to accept a potential customer in the first place. If they are accepted, they may then be placed in a "tier" where different tiers represent different risk levels. Once they are in a tier, a rating formula may be applied to determine the actual premium charged. All of these decisions are based on variables like age or driving experience (for auto insurance). Some variables are used for underwriting or placement in a tier but are not used in the actual rating formula.
    • I'm not sure if that addresses your question. You may be lacking background on certain aspects of insurance operations. This knowledge can be obtained from work experience or from earlier CAS exams such as online courses 1 and 2. Have you taken those earlier courses? You can also google these terms insurance terms. There are many online sources that provide this background information.
  • keshav1996keshav1996

    In Q3, I specifically how in the presence of exposure correlation would using the PP approach lead to double counting effect?

    Rest all doubts are clear uptil now.

    Thanks.

  • GrahamGraham

    For the example from the Werner text (also referenced in the wiki) the double-counting effect arises as follows:

    • First observe that high AOI homes have worse loss experience than medium and loss AOI homes. That means the relativity for high AOI homes should be higher, and it is.
    • Observe also that Territory 1 has better loss experience than Territory 2 or 3, and should have a lower relativity, and it does. So far, so good.
    • The problem is that Territory 1 has a higher proportion of high AOI homes than Territory 2 or Territory 3. Using the unadjusted pure premium method (that doesn't recognize this distributional difference) the high AOI homes in Territory 1 are going to push the Territory 1 relativity up. This is the double-counting effect. The poor loss experience for high AOI homes has already been reflected in the high relativity for high-AOI homes, but it is now being reflected again in the Territory 1 relativity.
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