ch7 doubts

keshav1996keshav1996
in W-07-OtherExpenses
  1. Spring 2017 (Q4) part d.--> It asks whether the company meets U/W profit expectations with a negative U/W profit provision of i.e -5%. But, if we input the values of Ult loss, WP, and U/w expenses into the fundamental insurance equation, we see that company has indeed earned a profit. So, why do all sample answers take the approach of comparing the ratio of given Ult loss and EP and comparing it with TPLR and then conclude that as the TPLR falls short, expectations aren't met? It only makes sense if the Ult loss and LAE amount given is the actual experienced losses for which the premium was written.
  2. Fall 2019 (Q6) part c(i).--> Can't variable expense need trending if expense trend differs from premium trend? Sample answer says they don't need trending.

Comments

  • jj96gotthisjj96gotthis

    Hi Graham,

    I have the same question for (2).

    The examiner's report says that variable expenses are defined to be a ratio to premium.

    "Variable expenses, by definition, are a percentage of premium and will automatically change when premium changes. Therefore, there is no need to trend variable expenses."

    Therefore, whether or not trending is needed for variable expense actually depends on whether premium is trended right? instead of whether the premium trend = expense trend as stated in the Battlewiki?

    Thank you for your explanation!

  • GrahamGraham

    Question 1: Spring 2017 (Q4) part d.--> It asks whether the company meets U/W profit expectations with a negative U/W profit provision of i.e -5%. But, if we input the values of Ult loss, WP, and U/w expenses into the fundamental insurance equation, we see that company has indeed earned a profit. So, why do all sample answers take the approach of comparing the ratio of given Ult loss and EP and comparing it with TPLR and then conclude that as the TPLR falls short, expectations aren't met? It only makes sense if the Ult loss and LAE amount given is the actual experienced losses for which the premium was written.

    • I don't really follow your reasoning. The rule is that if the actual loss ratio is less than or equal to the PLR then the company has met their U/W profit expectations. Otherwise they haven't. It's nothing more complicated than that.

    Question 2: Fall 2019 (Q6) part c(i).--> Can't variable expense need trending if expense trend differs from premium trend? Sample answer says they don't need trending.

    • This is a subtle point and the Werner source text is slightly inconsistent.
    • When discussing the "All-Variable" expense method, they state that this method assumes variable expenses vary with premium. (But that is not the same as saying that variable expenses vary with premium in general. You could have variable expenses that vary by some other parameter.)
    • Then later in the source text when they specifically discuss expense trending, they make the flat assumption that by definition, variable expenses are a constant percentage of premium. They then conclude that variable expenses do not need to be trended. I think this is what the examiner's report must be referring to.
    • Now: sometimes the graders like to test subtle points so I didn't want to make the assumption that all variable expenses vary by premium. That's why when I wrote that section in the wiki, I was more specific. If you had answered part (c)(i) by saying variable expenses do not need to be trended when they vary with premium, you should get credit. If you also added that if variable expenses are not assumed to vary with premium, then variable expenses might have to be trended, that should be also acceptable (and technically more accurate than the answer in the examiner's report.)
    • Overall however, keep in mind that part (c)(i) was worth only 0.25 points so they didn't want a long answer. But as long as you explain yourself (briefly) and demonstrate an understanding of the concepts, you should get credit even if your answer isn't exactly the same as the official answer.
    • And to answer @jj96gotthis: you are correct that if the variable expenses vary with premium but premium is not trended, then you may still have to trend variable expenses. All of this however is getting into very subtle points that while valid, do not seem to be what the graders were looking for given the question was only worth 0.25 points.


  • keshav1996keshav1996

    Hi Graham, I'm sorry but I'm still confused in Q1.


    Following info was given with an U/W profit provision of -5%.

    Written Premium 15,000

    Earned Premium 12,000

    Ultimate Losses and LAE 10,000

    Commissions and Brokerage 2,250

    Other Acquisition Costs 750

    Taxes, Licenses, and Fees 300

    General Expenses 360


    Now, if I simply insert the values in fundamental insurance equation, I get U/W profit as-

    15000=10000+2250+750+300+360 + UW profit

    1340= UW profit

    But, I thought that I'll have a loss of 5% when I wrote the policy. But instead, I earned a profit. SO what should I now conclude? And if you tell to take EP in the equation instead of WP, then why?

    Thanks.

  • GrahamGraham

    You are over-thinking this. It's meant to be an easy problem. The key concept is this:

    • total actual profit & loss is different from U/W profit & loss.

    If the total actual loss ratio is 83% then they indeed made a total profit of 17% but that isn't what the question is asking. They are asking how this value of 83% compares to the PLR of 80% that you calculated in part (b). The actual loss ratio is higher than the PLR so you conclude that profit expectations have not been met.

    The -5% U/W profit provision is just a target that's used to calculate the PLR (Permissible Loss Ratio). This value of -5% has nothing to do with the actual profit. If the U/W profit provision had been set to -8% (instead of -5%) then the PLR would have been 83% and in this case you would have concluded that profit expectations had been met.

    (By the way, the examiner's report solution to part (b) has an arithmetic mistake. This is explained in the footnote to the BattleTable for chapter 7.)

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