STAT4903 Actuarial Techniques Chapter 1

Study Notes

Understanding general insurance terminology is crucial; meanings can vary based on context.
Insurers need to estimate claims costs for accurate financial reporting and reserves for unpaid claims.

Pricing Decisions:
- Underestimating costs may lead to rate reductions, risking insolvency.
- Overestimating costs can result in inflated rates, losing market share and revenue.
Underwriting:
- Incorrect estimates can affect market entry/exit decisions, reinsurance needs, claims management, and capital allocation.

Misstated reserves can lead to inaccurate financial statements, impacting investor decisions and confidence in the insurer.

Underestimating future obligations may present a misleading financial health picture, delaying regulatory intervention and risking insolvency and policyholder safety.

The price of insurance is determined by the formula: Price = Cost + Profit.
Unlike non-insurance products, the ultimate cost for insurance is uncertain at the time of policy sale due to the nature of contingent events.

Ratemaking involves developing models for setting insurance prices.
A rating manual classifies risks and calculates associated premiums, evolving from basic to complex documents.
Premiums vary widely based on risk characteristics and the type of insurance involved (e.g., motor vs. property insurance).

The unpaid claims estimate is the actuary's assessment of future payment obligations from past events.
Important considerations include:
- Comparison of techniques and results.
- The impact of environmental changes on methodologies.
- Evaluation of methodologies for effectiveness in estimating claims.
Unpaid claim adjustment expenses cover costs relating to:
- Administering claims.
- Determining coverage.
- Settling or defending claims.
Complexity and extent of expenses can vary significantly by claim type, ranging from simple fire claims to complex liability cases.