2012#19
Hi,
I have difficulty to understand the exact meaning of certain items.
For "expected loss", is that expected unlimited or limited? If it is unlimited, why excess ratio 0.15 is not applied to this amount? If it's limited, then, the expected excess loss is 2.0M X 0.15 = 0.15M?
Then, what does the standard premium (2.0M) mean? If the 1.4M is the expected limited loss, then +0.15M excess + 0.4M expenses and profit + 0.1M converted insurance charge = 2.05M which is greater than 2.00M, why?
Also, why 0.07 should apply to 2.0M instead of the actual loss which is 1.5M? This is for the development of actual loss, no?
I just started Fisher as the first paper of Section B Excess, Deductible, and Individual Risk Rating. So, maybe the answer of my question is in another paper?
Thanks,
CFX
Comments
Hi,
Exam 8 questions tend to be much more holistic than questions from lower level exams. For this reason, if a question doesn't make complete sense yet don't panic, read on and circle back to it later once you're further through the material.
In general "expected loss" refers to the expected loss before the application of any loss limitation feature(s). If you're not sure on the exam, may sure you clearly state any assumption you may make.
The standard premium is the manual premium multiplied by any applicable experience and schedule modifications for the individual risk in question based on its prior policy history (see Fisher.ExpRating for more detail). The retrospective premium charged to the insured is the standard premium adjusted for the actual experience within the current policy term and is bounded by the minimum and maximum premiums. For example, if the retrospective premium at the second adjustment turned out to be $4 million then the maximum premium constraint means the insured would only be charged $3 million in this question.
A key piece to understand is where to apply the pieces of information that you're given. For example, the excess loss factor in this case should be applied to the standard premium. Whereas if you are given an excess ratio then it would apply to the unlimited expected loss (see Fisher.TableL for more detail). Similarly, the retrospective development factor applies to the standard premium rather than the loss because our goal is to develop a premium rather than an estimate for the loss. This way we develop a premium that allows us to automatically incorporate expense and profit provisions for example. Some of the later CAS exam questions do improve and often state (% of standard premium) next to the factor in question which greatly helps. However, we caution against relying on the CAS to provide such detail.
Another piece to be aware of is the Exam 8 syllabus has changed a lot since this particular exam question was written. So some of the terminology may not exactly line up with the Fisher reading but you should be able to translate the concepts from the Fisher paper to this question.
Hi,
Thank you for the reply. That covered my questions and make more sense to me now! You advice is good. By studying more, I can get better understanding on those similar concept. I just read in Robertson wiki page that:
Excess loss factors are calculated as the ratio of expected losses in excess of a limit to the total expected losses. For workers compensation the limit is the occurrence deductible or retention. The numerator is the expected losses in excess of the limit while the denominator varies depending on which paper you're reading. The Robertson and Clark papers use expected ground-up loss for the denominator but the NCCI retrospective rating manual uses standard premium.
CFX