Practice Questions and Solutions on the Use of Competitor Rate Filings and Third-Party Data by Insurance Companies and Criteria for Exposure Bases

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Basic Ratemaking, cited below. Students are encouraged to read these pages before attempting the problems.

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:
Werner, Geoff and Claudine Modlin. Basic Ratemaking. Casualty Actuarial Society. 2009. Chapters 3 and 4, pp. 47-50.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-16-1. Which of the following statements are true about insurance company rate filings? More than one answer may be correct.
(a) Rate filings always contain confidential information that is not available to the public.
(b) Rate filings typically include actuarial justification for proposed rate changes.
(c) Some rate filings only propose changes to the base rates of an insurance company; other rate filings can also propose changes in rating differentials - such as territory-based relativities or special discounts offered.
(d) Insurance companies will always file their complete rating manual with each rate filing.
(e) Competitor rate filings can always provide useful data to insurance companies for determining their own rates.

Solution S5-16-1. This question is based on the discussion in Werner and Modlin (46-47). The following answers are correct:
(b) Rate filings typically include actuarial justification for proposed rate changes.
(c) Some rate filings only propose changes to the base rates of an insurance company; other rate filings can also propose changes in rating differentials - such as territory-based relativities or special discounts offered.

Answer (a) is incorrect, because most rate filings are publicly available in entirety.

Answer (d) is incorrect; insurers will typically file only the manual pages they intend to change with a given rate filing.

Answer (e) is incorrect; if the competitor underwrites different risks or writes insurance in an area with different perils from those faced by the insurer in question, that competitor's data may not be particularly useful. The usefulness of competitor data presupposes fundamental similarities between the business of the insurer in question and that of the competitor.

Problem S5-16-2. Give six examples of third-party data used by some insurance companies, where the data originates from entities that are not insurance companies themselves.

Solution S5-16-2. The following are all valid examples, mentioned by Werner and Modlin (47):
1. Economic data such as trends in the Consumer Price Index (CPI) and its component indices, such as the construction cost and medical cost indices.

2. Geo-demographic data, such as U.S. census data estimating population density in a particular area or weather indices and theft indices for a particular area.

3. Credit data of individuals or corporations, used for credit-based insurance scoring in personal lines or commercial lines of insurance, respectively.

4. Records pertaining to individual drivers from the Department of Motor Vehicles.

5. Distance from a house to a fire station.

6. Type of soil for earthquake insurance.

7. OSHA inspection data for workers' compensation insurance.

8. Attributes of the hospital in which the doctor practices for medical malpractice insurance.

9. Type of owner for commercial general liability insurance.

Problem S5-16-3. List the three criteria for a good exposure base, as described by Werner and Modlin (49).

Solution S5-16-3. The three criteria for a good exposure base are as follows:

1. It should be directly proportional to expected loss.

2. It should be practical.

3. It should consider any preexisting exposure base established within the industry.

Problem S5-16-4. It has been calculated that 30 exposures for a particular line of insurance correspond to expected losses of 7000. Assume that the exposure base was selected to perfectly meet the proper criteria for a good exposure base. What is the amount of expected losses to which 95 exposures ought to correspond, all other things equal?

Solution S5-16-4. A good exposure base should be directly proportional to expected loss.

Thus, if 30 exposures correspond to expected losses of 7000, then 95 exposures should correspond to expected losses of (95/30)*7000 = 22166.666666667.

Problem S5-16-5. You have found an intuitive exposure base that you expect to be directly proportional to expected loss. What are some possible issues that might arise so as to prevent this exposure base from being practical? List three such general issues.

Solution S5-16-5. The following are all possibilities discussed in Werner and Modlin (50):

1. Measurements of the exposure base may be difficult to verify.

2. Measurements of the exposure base may be too costly to obtain.

3. The exposure base may leave open the possibility of moral hazard through insureds' dishonest manipulation of exposure information and failure to disclose accurate data.

4.The technology that would enable accurate measurement of the exposure base may not yet be available.

See other sections of The Actuary's Free Study Guide for Exam 5.