What are the pros and cons of specialization by firms.

A general insurance company is using a generalised linear model to set risk premium rates for a book of business. The rating factors available are as follows: Rating factor Possible values Age attained 16 to 120 Gender M or F Employment type A. B. C. D or E The model uses a linear variate for age attained. The following are three observations in the data: Observation Age attained Gender Employment 18 M D W N - 55 A 92 M E (1) Construct for the model: (a) a vector of parameters (b) a design matrix including a row for each of the three observations (c) a set of definitions for the columns of the design matrix (3] The modeller wishes to improve the model for claims frequency by reducing the number of parameters. The following chart illustrates the data relating to employment type. 100 Employment measure Claims treg A C D E Employment types Exposure [RH axis) Observed average (LH axis) (i) Describe suitable methods for reducing the number of parameters. [2]2 A general insurance company is reviewing the expense loadings in its premium rates. Discuss the difficulties that are likely to arise when subdividing expenses between new business and renewals. [4] 3 (1) Describe the cover given under risk excess of loss reinsurance. [2] (ii) Explain "reinstatement" in the context of risk excess of loss reinsurance. [4] [Total 6] 4 A general insurance company is about to write commercial property insurance for the first time. (1) State the reasons for the company to monitor business written. [3] The Managing Director has requested a regular report on premium rate changes to assist with monitoring profitability and has suggested the following as possible definitions: (a) change in average premium per unit of expected loss calculated considering each individual risk written (b) change in average premium per unit of expected loss calculated considering a basket of risks representative of the portfolio (c) the class underwriter's overall view of premium-rate changes (ii) Explain the relative merits of these three definitions. (6]