1 AS 4824/9824 midterm 1 Oct. 13, 2020 Name: Student Number: Note: The total marks included in the exam is 50 points. Please give short answers to questions 1, 2, and 3 in the Word file and answer questions 4 and 5 in the Excel file. Note: Please submit before 11:25am. No late submission will be accepted. When submitting, include your name in the file name. In addition, include your name and student number in the Word and Excel files. Note: This test is open book. However, I trust that you will complete it independently. Good luck! Q1. (6 points) (1) Describe two differences between the coverages provided by a life insurance policy and a property/casualty insurance policy (other than one covers life and the other one covers casualty/property). (2 points) (2) Explain the “doctrine of proximate cause” in the context of the homeowners insurance policy. (2 points) (3) List two important steps an actuary needs to perform before applying method such as Chain-Ladders to estimate loss reserves. (2 points) Q1 solutions: • (1) a. Life insurance policies are long-term whereas p/c insurance policies are short- term b. The amount of payment is specified in Life insurance policy, the size of payment in a typical p/c insurance policy is random. c. There can be only one claim for a Life insurance policy. Multiple claims may occur for a p/c insurance policy. d. Other reasonable answers are accepted • (2) A loss is covered only if a covered peril is the proximate cause of a covered consequence. A covered peril is the proximate cause if it initiates an unbroken sequence of events leading to a covered sequence. 2 • (3) • Consistency with financial statement data – Can the actuary reconcile the data with financial statement data • Consistency with prior data – Is the current data consistent with the data used in the prior analysis? If not, why? • Data reasonableness – Are there certain values that appear questionable, such as large negative paid claims or apparent inconsistencies between data elements?\ • Other reasonable answers are accepted Q2. (10 points) This question concerns personal auto insurance policies: (1) Explain the concept of "no-fault" insurance in the context of auto insurance. (2 points) (2) Describe the rational behind “no-fault” insurance and discuss how successful it was when applied in practice. Provide the title and authors’ names if you have used references (4 points) (3) Discuss the pros and cons of introducing a deductible term in auto liability insurance. (4 points) Q2 solutions: (1) The no-fault approach to compensation emphasizes providing compensation more broadly than in the tort approach, without restricting it to those who can prove that another party was negligent or at fault for the accident. Compensation is usually restricted to economic loss. Noneconomic loss, such as pain and suffering or loss of consortium is excluded or limited The following is from the textbook: Under a no-fault system, the injured party does not have to sue for compensation or even prove that the driver of the other car was at fault for the accident. instead, the benefits that would normally be paid by an at-fault party’s liability insurance become payable under the insured’s personal injury protection. So instead of the injured party suing for damages because of bodily injury or property damage, the injured party gets the level of benefits defined in the policy’s personal injury protection (accident benefits in Canada). Thus the benefits are not paid by the insurer of the at-fault driver; the benefits are paid by the injured party’s own insurer. The (2) The rational was to reduce the cost of legal system. The injured is paid faster because “fault” do not have to be determined. The no-fault system was at most partially successful (achieving its goal of reducing cost). 3 In practice, the no-fault system was not very successful. the hoped-for premium-cost reductions never materialized, according to the Rand report. Other plausible answers are accepted. (3) Deductible in auto-liability The majority of students copied the comments from the textbook, which is okay. However, one should at least notice that the question is about (third party) liability insurance and should add the answer accordingly. In fact, there is no deductible provision in (third party) auto-liability policies and should ask why. This is the reason why one mark is deducted for most students. One of the reasons why auto liability insurance is mandatory is to ensure that injured will get paid. If there is a deductible provision, it is possible that an at- fault drive is not willing to pay or can not afford the deductible, in which case the injured cannot get paid. So a driver cannot buy an auto liability policy with deductible to save premium-it is not an option. Q3. (4 points) From year X and on, the regulators require insurance companies to report discounted loss reserves rather than the undiscounted values. Discuss how reporting discounted reserve might affect the profit level of insurance companies. Which line of business – Homeowners or the professional liability- will this requirement affects more, and why? Q3 answer: The report profit should increase because the liability (loss reserve) decreased due to the discounting. Professional liability will be affected more because the settlement period is usually very long, resulting in large discounting factor. 4 Q4. (10 points) Your company issued a general liability insurance policy on 1/1/2019. Expected losses on the policy is 1 million. The expected payment pattern is given by the following (This table is also provided in the attached Excel file at page (sheet Q4): Months from beginning of Accident Year Cumulative Percentage paid 12 20% 24 40% 36 60% 48 75% 60 90% 72 100% You know that $160,000 has been paid as of December 31, 2019. Assuming all future loss payments are made in the middle of each year, calculate the discounted loss reserve to be carried by your company as of December 31, 2019. Assume a discount rate of 5%. (10 points) Q5. (20 points) Please refer to the Excel file on page (sheet) Q5. Note: For Questions 4 and 5, please provide your answer within the excel file, along with necessary annotations.
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