2. Establish the Price: Rating
Chapter 9
Establish the Price: Rating
11 questions = 14% of the exam

3. Learning Objectives:
After studying this chapter, you should be able to:
Describe the types of operational data needed by senior management to implement underwriting
Explain the significance of claims information on underwriting terms and premiums rates
Explain the relationship between frequency and severity as components of risk
Explain claims loss ratios and there impact on premiums and accepting risk
Explain and compare the different types of monitoring and accounting periods

6. Reporting to Underwriting Managers
Data Required
Board Level
Reporting to Underwriting Managers
Operational Data

7. Board Level Reporting Issues concerned at this level are: Growth
Exposure accumulations
Loss ratios
Competitive positioning
Underwriting margin/profit
Return on capital
Business mix
Solvency

8. Reporting to Underwriting Managers
Generally reported monthly, looks at trends over time:
Growth by product
Rate Changes
Retention Rates
Commission Rate
New Business / Lapse Flow Analysis
Expense Ratio
Loss Ratios
Exposure Accumulations
Claims – Trends / Large Losses / Weather Related / Reserves
Market Share / Competitor Activity

9. Operational Data Reporting
This could be monthly, often weekly sometimes day to day:
Loss ratio claims statistics
Rate increases
New business
Credit control
Retention
Compliance with contract certainty standards

11. Importance of Claims Information
Claims are the major “cost of production” in insurance and accurate analysis is key to profitability.
Identifying trends is important.
When analysing underwriters consider:
Looking at each year chronologically
Is the number of claims increasing or decreasing?
What are the causes of the claims?
Are any large claims distorting the pattern?
Are individual claims reserves accurate?
What is the position regarding underlying claims?
How are the claims recorded?

13. Frequency and Severity of Claims1 30
300

14. Frequency and Severity of Claims
What is the risk profile for…

16. Claims Loss Ratio 𝐶𝑙𝑎𝑖𝑚 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 ×100=𝐶𝑙𝑎𝑖𝑚𝑠 𝑅𝑎𝑡𝑖𝑜
This is the ratio of claims to premiums
What would the claims ratio be if a company has a premium income of £60’000 and claims of £75’000?
𝐶𝑙𝑎𝑖𝑚 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 ×100=𝐶𝑙𝑎𝑖𝑚𝑠 𝑅𝑎𝑡𝑖𝑜

17. Earned Loss Ratio
Not all policies run from 1st January to 31st December as the financial year does.
So if a policy starts on 1st July then it will only have earned 50% of the premium in that financial year.
So the earned loss ratio is calculated by comparison of the claims for the period to the 31st December against the premium earned as above.
At account level you may also include reinsurance spend and Incurred but not reported (IBNR) claims.

19. Main types of monitoring
Policy year
Underwriting year
Calendar year
Accounting year
Main types of monitoring

20. Account Performance and Monitoring
Policy Details
Claim details
Policy period
Premium
Date of loss
Value
Policy A
1/7/10-30/6/11
1/7/11-30/6/12
1/7/
£1,000
£1,500
£2,000
1/12/11
1/3/12
£100
£250
Policy B
10/4/09-09/4/10
10/4/10-09/4/11
10/4/11-09/4/12
10/4/12-09/4/13
£5,000
£4,000
£4,500
1/7/09
1/2/10
1/5/11
28/6/12
£2,500
£10,000
£3,000

21. Policy Year
This is used to track the performance of individual policies. Each 12 months of cover is treated as a separate policy year.
So for policy A the data would look like:
Period
Premium
Claims
Value
Year1: 1/7/10-30/6/11
£1,000
Year 2 1/7/11-30/6/12
£1,500 2
£350
Year 3 1/7/12-30/6/13
£2,000
total
£4,500
What is the loss ratio for this policy ?
7.77%

22. Underwriting Year
This will be monitored at account level, with individual policy data being grouped into underwriting years. Based on the year that the policy incepts (or renews)
Underwriting year
Policies
Premium
Claims
Value
Loss ratio
01/01/09 – 31/12/09 1
£5,000 2
£3,500
70%
01/10/10 – 31/12/10 0%
01/01/11 – 31/12/11
£6,500 3
£10,350
159.20%
01/01/12 – 31/12/12
£3,000
46.15%
Totals 7
£23,000 6
£16,850
73.26%
NB: The total loss ratio is wrong in the CII’s own text book

23. Calendar Year
With this type of monitoring, premiums and claims from individual policies are allocated to a calendar year. Claims are allocated to the relevant year on the basis of the date of loss:
Calendar year
Claims
Value
2009 1
£1,000
2010
£2,500
2011 2
£10,100
2012
£3,250
2013

24. Accounting Year
Very similar to the accounting year approach where a business chooses the end of there accounting year as 31st March or 5th April.
Prospective premium and claims developments from accounting year end have to be estimated.
Because estimates are incorporated, trends are harder to detect; therefore, this information should only be used to support decision-making as a last resort.

26. Which of the following is one of the main types of monitoring period used in data analysis?
a. Fiscal year.
b. Policy year.
c. Financial year.
d. Claims year.

27. Operational data is the lowest level of Management Information (MI) in an organisation. Operational data does NOT include:
a. business mix.
b. retention ratios.
c. rate increases.
d. new business.

28. What provides the most accurate measure of performance at policy level?
a. The earned loss ratio.
b. The outstanding loss ratio.
c. Combined ratio.
d. Claims loss ratio.

29. When looking at claims data, what is an underwriter MOST likely to consider?
a. The costs of handling claims.
b. Whether premiums are set at the right level.
c. How quickly claims are notified.
d. Whether underwriting procedures have been followed.

30. Jack and Jill take out a household insurance policy
Jack and Jill take out a household insurance policy. What is the period of cover from inception to first renewal in twelve months’ time known as?
Accounting year.
Policy year.
Calendar year.
Underwriting year.