Questions regarding Exam 6C

olidude3121olidude3121
in General
  1. IBC Flood 2019: Why is it preferred to have cross-subsidization (between low/med and high risks) to ensure affordability then having high risks premiums subsidize through tax revenue? The only reason I can think of is it less of a burden on society as only policy holders will subsidize while tax revenue involves a much larger % of population.
  2. IBC Flood 2019: For option #3, what is meant when it says "administered by insurance industry, governed and guaranteed by gov"? What's the difference between governed and administered?
  3. Agricultural Insurance: I'm confused as to what the roles each players play, does the government act as a reinsurer for the private production insurance market AND write policies with perils not offered on the private market or just the latter or is just does the federal government reinsurer the provincial one?
  4. Agricultural Insurance: Is the balance-back factor similar to the off-balance factor from Exam 5? Also, is it a way of ensuring the aggregate premium stays the same so the "discounts" are actually being subsidized by other policy holders?
  5. Agricultural Insurance: I'm confused what the cost-share levels mean?
  6. Osfi Eqk: What do you mean when you write in Principle #2 Data Management: "data required is MORE than for traditional ratemaking"? Does it mean data management is more important/impactful? If so is it because of the difficulty in nature of eqk pricing and reserving due to the low frequency and wide range of severity?

Thanks a lot!

Comments

  • grahamgraham

    Question 1: Subsidies

    • Can you cite the specific source of this statement? That would help me provide a better answer if I know the context.

    Question 2: Govern vs. Administer

    • The government sets the rules (governs) and the insurance companies implement (administer) the rules. So the insurance companies do the day-to-day tasks like setting rates, writing policies, and handling claims but they do so in accordance with the rules and regulations set out by the government.
  • olidude3121olidude3121

    1 - The question I'm asking refers to the "Shield the tax payer" principle of flood risk management. Why is it beneficial to shield the tax payer as opposed to avoiding cross subsidization. From my understanding, to ensure affordability there's 2 main methods:

    (a) Cap the premiums and tax payer fund the rest or (b) Cap the premiums and have cross subsidization between risks.

  • grahamgraham

    Ok, I see. There isn't really a "correct" answer. These principles (shield the taxpayer, avoid cross-subsidization) are both valid pricing principles on their own, but when you actually design a flood insurance program, some of these individual principles will conflict with each other. In an ideal world, each risk category (low, medium, high) would support themselves without cross-subsidization or taxpayer support, but that's probably not possible in the real world. It's then a matter of judgment how to allocate the burden between the different stakeholders.

  • grahamgraham

    Question 3:

    Question 4:

    The definition of balance-back factor given in the source text is:

    • a factor applied to premium rates designed to correct the overall premium collected for discounts and surcharges given to individual producers (also called off-balance factor)
    • So yes, it's like the off-balance in Exam 5

    Question 5:

    • The concept of cost-share levels is not discussed in detail in the source text. All they say is that premium costs are shared between producers, provincial government, and federal government. For example 40% / 24% / 36% respectively.
    • The confusing part is that it isn't always the same. The cost-sharing percentages I just listed are for the cost-share level call "Comprehensive Costs". But the percentages change for the cost-level called "High Cost", and then again for "Catastrophic Cost".
    • Note the administrative expenses are always shared in the ratios: 0% / 40% / 60%.
    • What I've written above and what's in BattleCards 42 and 43 in the Full BattleQuiz should be all you need to know for the exam. (In any case, I think this is a low-probability question because there are lots of other more important concepts from the agriculture reading.)
  • grahamgraham

    Question 6:

    Here's a direct quote from the source text:

    • The data required to run earthquake models goes beyond that traditionally used to rate insurance policies. Improving data consistency, accuracy and completeness is one area where an insurer’s efforts can significantly reduce the uncertainty inherent in earthquake exposure measurement. Good earthquake exposure data facilitates the management of this risk through risk transfer, pricing and monitoring against limits as well as catastrophe modeling.

    In the wiki, I used the second bullet point to explain what's meant by "more":

    • must address data Integrity, Verification, Limitations

    And presumably, the above items must be given attention beyond what would be required in other lines of business (like auto insurance) where data volume would be greater and therefore more credible from the outset.

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