1. Functions of Insurers
1. Ratemaking
2. Production
3. Underwriting
4. Loss Settlement
5. Investment

2. Basic Concepts in Ratemaking
Rate Price charged per unit of protection
Premium Determined by multiplying rate by units of protection purchased
Gross Rate Composed of two parts, designed to pay losses and expenses
Pure Premium Portion of the Gross Rate designed to pay losses
Loading Portion of Gross Rate designed to cover expenses of operation

3. Pure Premium
Total Losses Exposure Units = Pure Premium
$3,000, ,000 = $30

4. Converting Pure Premium to Gross Rate
Expense part of the rate Expense Ratio: expressed as percentage of the final rate
Permissible Loss Ratio: 1 minus expense ratio
Pure Premium Gross Rate: 1 _ expense ratio
$ = = $

5. Types of Rates
1. Class rates
2. Individual rates
judgment rating
schedule rating
experience rating
retrospective rating

6. Adjusting the Level of Rates
Actual - Expected Loss Ratio Loss Ratio X Credibility Expected Loss Ratio Factor = Adjustment
X .50 =

7. Underwriting
1. Basic purpose: avoid adverse selection
2. Relationship of underwriting to adequacy of rates
3. Exposure that is unacceptable at one rate may be acceptable at another

8. Life Insurance Underwriting Classes
Standard
Preferred
Substandard (rated)
Uninsurable

9. Sources of Underwriting Information
1. The application
2. Information from the agent or broker
3. Investigations
4. Information bureaus
5. Physical examinations or inspections

10. Postselection Underwriting
1. Postselection underwriting (or renewal underwriting) occurs when the insurer decides whether to continue insurance.
2. Insurer may decline to renew insurance or may offer narrower coverage.
3. Because cancellation or nonrenewal can impose hardship on insured, some states limit the insurer’s right to exercise these options.
4. When the option of postselection underwriting is limited, insurers may be more selective in initial underwriting.

11. Adjusters
1. Staff adjusters
2. Adjusting bureaus
3. Independent adjusters
4. Public adjusters

12. Adjustment Process
1. Notice
2. Investigation
3. Proof of loss
4. Payment or denial

13. Composition of Insurers’ Investments
Life Property Type of Investment Insurers & Liability
Corporate Stocks 20.6% 21.2%
Corporate Bonds 41.0% 18.3%
Government Bonds 17.1% 51.2%
Mortgages 8.9% 0.4%
Real Estate 2.1% 1.3%
Policy Loans 4.3%
Miscellaneous % %
100.0% 100.0%

14. Miscellaneous Insurer Functions
Legal
Accounting
Engineering

15. Retrospective Rating
1. A cost-plus approach to pricing in which the premium is determined after the policy period based on actual losses incurred
2. Retrospective rating formula computes a premium based on
actual losses incurred
loss adjustment expense
premium taxes
allowance for insurer expenses and profit
charge for the “insurance” element

16. Retrospective Formula
[Basic Premium + (Losses X Loss Conversion Factor)] X Tax Multiplier
Standard Premium = $100,000
Basic Premium = .20 of standard premium
Loss Conv. factor = 1.14
Tax Multiplier = 1.03

17. Retrospective Rating Illustration
(1) (2) (3) (4) (5) Incurred Converted Basic (2) + (3) (4) X Losses Losses Premium X
$20,000 $22,800 $20,000 $42,800 $50,000
40, , , , ,950
60, , , , ,052
80, , , , ,536
100, , , , ,020
120, , , , ,000