SA3 September 2009 Question 1 (vii)

[Kieran Rowles]

Hi, I had a few questions about the Sept 2009 exam (and more broadly about rate change) that I was hoping someone could help me with.

For part 1 (vii) of SA3 September 2009, the question asks ‘outline the key exposures …’ of the professional indemnity business. Is this effectively just asking us the risks that particularly impact PI business (whilst considering the characteristics of this individual book)?

There was 1 point in the solutions that I also particularly struggled with:

“Given the slow development, rate changes are of critical importance for this business for early years of development as emerging experience will be insufficient / lack of data on solicitors”

Is this just saying that because of the slow development and lack of data for the PI business we need to use rate change as a measure of the adequacy of historical premiums charged to allow us to assess the profitability of the product (and help set reserves via an initial expected loss ratio approach?)

My current understanding is that rate monitoring is where you create an indices of rates after stripping out the effect of changes to the level of exposure and structure of the risk to assess how adequate the premiums charged were over time. Is this mainly conducted to identify AYs where premiums may have been inadequate (i.e. years prior to large increases in rate)

Thanks!

 

[Busy_Bee4422]

Hi

1. Yes exposure in the context of this question is referring to sources of risk. I would take the hint from the end of the question.

2. In the context it is more likely referring to adjustments to current pricing (rate changes) in the context of sparse data. You have a pricing risk because any rate changes you want to make are based on little data early on.

 

[Kieran Rowles]

Hi

1. Yes exposure in the context of this question is referring to sources of risk. I would take the hint from the end of the question.

2. In the context it is more likely referring to adjustments to current pricing (rate changes) in the context of sparse data. You have a pricing risk because any rate changes you want to make are based on little data early on.

Thanks for you response.

I think it's the second point where i'm getting a bit stuck. Isn't rate monitoring typically where an insurer creates an indices of its own rates and if that's the case surely analysing how that insurer has changed its own price over time wouldn't help them in setting their future prices (particuarly as those past rates have also suffered from lack of data).

Or in this case, is the rate monitoring in question a monitoring exercise of competitors / market rates, with the intention that the market may have more data than the insurer so the insurer should analyse how the market price changes and follow this pattern too ensure it is not caught out by its lack of data.

And more generally does that mean that rate monitoring is more often than not an analysis of market rates rather than internal rates (or its actually a mix of the 2 depending on the purpose)?

Cheers

 

[Busy_Bee4422]

Hi

I think you are getting tripped up by the phrase "rate change" in an instance where it is being used instead of "changing the rates". In this case, any future changes you want to make are a source of risk because you don't have enough data to make an informed price review. Extra care is therefore needed to deal with the risk of mispricing.

Rate monitoring in this context of this question needs to deal with premium adequacy first since we have a poor-performing book. Rate monitoring will analyse internal rates at a point in time, over time and against competitors depending on the purpose.