Question

1. Define each of the following:
   1. Loss reserves
   2. Unearned premium reserves
   3. Loss-adjustment expenses (balance sheet item)
   4. Policyholder’s surplus
   5. Loss ratio
   6. Expense ratio
   7. Combined ratio
   8. Investment income ratio
   1. Overall operating ratio
2. What are the three regulatory objectives of ratemaking?
3. Explain each of the following in the context of ratemaking.
   1. Judgement rating
   2. Class rating
   3. Pure premium method
   4. Loss ratio method
   5. Merit rating
   6. Schedule rating
   7. Experience rating
   8. Retrospective rating

Special Note: Please answer all three questions as they are short. Thank you.

Answer 1

Answer(a):

Loss Reserve- It is an estimate of insurer's liability from the future claims. Loss reserve is helpful for insurer to cover claims that are made against policies that it underwrites. Whenever insurance company underwrites a new policy, it records a premium receivable that is an asset and a claim obligation that is a liability. The liability is considered part of unpaid losses accounts that represent the loss reserve.

Answer(b):

Unearned premium reserves- It is a liability, shown in the balance sheet. It is the amount of premium written but not yet earned.

Answer(c):

Loss-adjustment expenses- It is an expense associated with investigating and setting an insurance claim. There are two types of Loss-adjustment expenses:

Allocated- Accumulated during the active investigation of a claim.

Unallocated- Created by the overhead of having to do investigations

Answer(d):

Policyholder Surplus- Are the assets of the policyholder minus the liabilities. Policyholder surplus indicates an insurance company's financial condition. Policy holder surplus is used by rating companies to analyze the financial health of insurance companies.

Answer(e):

Loss Ratio- For insurance companies, Loss ratio is the ratio of total losses incurred in claims plus adjustment expenses divided by the total premium earned. It is the ratio of losses to premium earned. A higher loss ratio is not good while a lower loss ratio is good for insurance companies.

Answer(f):

Expense ratio- It is charged by mutual funds companies from investors to manage the mutual funds and exchange traded funds. It is calculated by dividing the mutual fund's operating expenses by average total dollar value for all the assets.