Why do specialized workers receive higher pay?
The Claims Director of a general insurance company has received a report on claims frequencies for its household-contents business. The report shows that policyholders with a professionally-maintained burglar alarm linked to the police have a higher overall frequency of theft claims than policyholders with a lower standard of security. The Claims Director is aware that the Company offers lower prices for policyholders with higher standards of security so would like to understand the reason for the apparent contradiction. The company uses a generalised linear model to assess claims cost for the policies. (i) Discuss the matters that should be investigated and points that should be raised in a reply to the Claims Director. [6] (1i) Outline analyses of rating factors in the claims model that could help to illustrate the reply. [3] [Total 9] Nine months ago a general insurance company underwrote a new motor fleet policy covering 1,000 vehicles. Based on its normal premium-rating assumptions the insurance company expected a claim frequency of 16% per year. To date, 109 claims have been received, and the promptness with which claims have been reported suggests that there are no claims that have been incurred but which have not been reported. The contract is now being considered for renewal and the underwriter has asked whether or not it is appropriate to rate the new contract on the basis of its claims experience to date. (a) Explain whether or not you think that this is likely to be appropriate; and (b) Suggest a claims frequency that might be used in the re-rating. Base your answers on credibility theory and state any assumptions that you make. [7] A small well-capitalised London-market insurance company underwrites a variety of direct commercial and industrial property and liability insurance. Outline, with reasons, the types of reinsurance it is likely to buy. [8]Company B, a general-insurance broker, has for several years arranged general insurance. All policies have been underwritten by a single general insurance company, S. B is planning to set up a new arrangement under which it will broke policies to a panel of general insurance companies instead of solely to S. Each policy will be underwritten by the panel member offering the lowest quote net of commission. Panel members may decline to quote for each risk, but each policy will be reoffered to all panel members on renewal. A general insurance company, U, has been invited to join the panel. (i) List the data that U should request from B for the purpose of creating a pricing structure. [4] (ii) Discuss the most likely sources of error or distortion in the data requested by U. [5] U is disappointed with the quality of the data supplied by B, particularly for sole traders and for liability covers. (iii) Explain the likely effect of the inadequate data on U if it creates a pricing structure based on it. [3] (iv) Suggest measures that U could take to mitigate the effects of using the poor- quality data. [4]
