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What are the 4 common classifications of underwriting expense? - correct answer 1. Commissions and Brokerage 2. Other acquisition 3. General 4. Taxes, Licenses, and Fees (not including federal income tax) What are the two main sources of underwriting profit? - cor...

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CAS Exam 5

What are the 4 common classifications of underwriting expense? - correct answer 1. Commissions
and Brokerage 2. Other acquisition 3. General 4. Taxes, Licenses, and Fees (not including
federal income tax)

What are the two main sources of underwriting profit? - correct answer 1. Operating Income (pure
underwriting profit) generated from individual insurance policies 2. Investment income generating
by investing funds held by company

What is the Product Pricing Fundamental Equation adapted for insurance companies? - correct answer
Price = Cost + Profit Premium = Losses + LAE + UW Expenses + UW Profit

What is the primary goal of ratemaking? - correct answer The primary goal is to have a balanced
fundamental insurance equation.

What is the first CAS ratemaking principle? - correct answer A rate is an estimate of the expected
value of future costs Since ratemaking is a prospective process, the cost of insurance is
unknown when the product is sold, therefore the components of the fundamental insurance equation
must be estimated.

What is the second CAS ratemaking principle? - correct answer 1. A rate provides for all costs
associated with the transfer of risk. 2. Equilibrium should be achieved at the aggregate
level. The goal of ratemaking is to have a balanced fundamental insurance equation.

What is the third CAS ratemaking principle? - correct answer A rate provides for the costs
associated with an individual risk transfer A policy with more risk should cost more (E.g. WC -
steel worker on a high-rise vs. a clerical worker)

Frequency - correct answer Frequency = # of claims/# of exposures Used to identify trends in
claims occurrence or ulitization and to measure the effectiveness of u/w actions Most commonly
use reported claims to earned exposures

,Severity - correct answer Total Losses/# of claims Provides information on loss trends and the
impact of changes in claims handling procedures Can be paid, reported, or ultimate severity

Pure Premium (Loss Cost) - correct answer Total Losses/# of Exposures = Frequency x Severity 
Highlights trends in overall loss costs due to changes in both frequency and severity

Average Premium - correct answer Total Premium/# of Exposures Highlights changes in the mix of
business Premium and Exposure should be on the same basis (earned, written, etc)

Loss Adjustment Expense Ratio - correct answer Total LAE/Total Losses Used to monitor stability
of costs assocaited with claims settlement procedures

Underwriting Expense Ratio - correct answer Total U/W Expense/Total Premium May be broken
into two pieces to better match expense to associated premium: Expenses incurred at the onset of
the policy/Written Premium and Expenses incurred throughout the policy/Earned Premium

Operating Expense Ratio (OER) - correct answer U/W Exp Ratio + LAE/Earned Premium

Combined Ratio - correct answer Loss Ratio + OER This is the primary measure of profitability of a
book of business

Retention - correct answer # of policies renewed/# of policies available to renew Helps determine
competitiveness of rates, Closely monitored following rate changes and major changes in service, and a
key parameter in projecting future premium volume

Close Ratio (Hit Ratio or Conversion Rate) - correct answer # of accepted Quotes/# of Quotes 
Measures the rate at which prospective insureds accept a quote for new business, and is useful for
product management and marketing

What are the four common components of a rating manual? - correct answer 1. Rules - contains
qualitative info to help user with algorithms (such as definitions, available policy forms, classification of
risk, etc.) 2. Rate Pages - contains #'s such as base rates, rating factors and fees needed to calculate
premium 3. Rating Algorithm - provides detailed instructions on how to calculate the policy

, premium 4. Underwriting Guidelines - not always included in rating manual, but contains decisions
to accept, decline, or refer risks, company placement and tiering strategy

Base Risk - correct answer Specific risk characteristics selected by insurer that may be the most
common or selected based on marketing purposes - the base rate is applicable to the base risk

Rating Variables - correct answer Used to adjust the base rate for different characteristics, may be
multiplicative or additive. Sometimes refered to as discounts/surcharges or credits/debits

Rating Algorithm - correct answer Includes items such as: Order to consider rating
variables How rating variables are applied (multiplicative vs. additive) Max and Min
Premiums Rounding instructions Algorithms often vary by coverage type

Why would an insurance company write business under different companies? - correct answer 1. Way
to sell similar products at different rates for risks with varying u/w characteristics 2. Regulatory
Issues - cannot get all rate options approved for a single company 3. Different distribution systems
of using agents vs. direct sales

What are three considerations to make when there is limited data available for a rate review? - correct
answer 1. Must be aware of the impact on the analysis 2. Should examine how sensitive the
results are to various assumptions 3. Select data the minimizes distortions in results

What are the two main types of internal data used in the ratemaking process? - correct answer 1. Risk
information - exposures, premium, claim counts, losses, and explanatory characteristics (data usually
stored in two databases - a policy database and a claims database) 2. Accounting information -
underwriting expenses, ULAE (this data is not specific to one policy or even a single line of business)

What three objectives apply when aggregating data for ratemaking? - correct answer 1. Accurately
match losses and premium for the policy 2. Use the most recent data available 3. Minimize data
collection and retrieval costs

Advantages and Disadvantages of Calendar Year Aggregation for ratemaking - correct answer
Advantages No future development Readily Available (most financial reporting
done on a CY basis) Most responsive to ratemaking because there is no delay due to developing
losses Disadvantages Mismatch between premium and losses

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