2. Ratemaking ASOPS By the CAS Committee on Professionalism Education

3. WHY ASOPs? As a CAS Member You Are Bound By: As a CAS Member You Are Bound By: Actuarial Standards of Practice (ASOPs) Actuarial Standards of Practice (ASOPs) Code of Professional Conduct Code of Professional Conduct Statement of Principles Statement of Principles Qualification Standards Qualification Standards Continuing Education Requirements Continuing Education Requirements As an Actuarial Candidate You Are Bound By: As an Actuarial Candidate You Are Bound By: Code of Professional Ethics for Candidates Code of Professional Ethics for Candidates

4. How were ASOPs created? IS AFFILIATED WITH CASUALTY ACTUARIAL SOCIETY CASUALTY ACTUARIAL SOCIETY STATEMENTS OF PRINCIPLES STATEMENTS OF PRINCIPLES STANDARDS OF PRACTICE STANDARDS OF PRACTICE ACTUARIAL STANDARDS BOARD ACTUARIAL STANDARDS BOARD AMERICAN ACADEMY OF ACTUARIES AMERICAN ACADEMY OF ACTUARIES PROMULGATES ARE USED BY HAS FORMED PROMULGATES

5. How to Read an ASOP ASOPs have a consistent format: Table of Contents Table of Contents Cover Letter Cover Letter Section 1: Purpose, Scope, and Effective Date Section 1: Purpose, Scope, and Effective Date Section 2: Definitions Section 2: Definitions Section 3: Analysis of Issues and Recommended Practices Section 3: Analysis of Issues and Recommended Practices Section 4: Communications and Disclosures Section 4: Communications and Disclosures Appendix 1: Background and Current Practices Appendix 1: Background and Current Practices Appendix 2: Comments/Responses on Drafts Appendix 2: Comments/Responses on Drafts

6. Applicability Guidelines for Actuarial Standards of Practice – As of Dec 2009

7. Question #1 True or False: Are the applicability guidelines clear, concise, and complete? True or False: Are the applicability guidelines clear, concise, and complete? TRUE TRUE FALSE FALSE

8. Answer #1 True is an Incorrect Answer True is an Incorrect Answer Press to retake Question #1

9. Answer #1 The correct answer is False: The correct answer is False: These applicability guidelines should not be considered complete. They are general recommendations and not the final word. Every actuary is bound by every ASOP regardless if it’s on the list for your practice area in the applicability guidelines. These applicability guidelines should not be considered complete. They are general recommendations and not the final word. Every actuary is bound by every ASOP regardless if it’s on the list for your practice area in the applicability guidelines.

10. RATEMAKING ACTUARIAL STANDARDS OF PRACTICE ASOP # 12 Risk Classification (for All Practice Areas) ASOP # 12 Risk Classification (for All Practice Areas) ASOP # 13 Trending Procedures in Property/Casualty Insurance ASOP # 13 Trending Procedures in Property/Casualty Insurance ASOP # 25 Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages ASOP # 25 Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages ASOP # 29 Expense Provisions in Property/Casualty Insurance Ratemaking ASOP # 29 Expense Provisions in Property/Casualty Insurance Ratemaking ASOP # 30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking ASOP # 30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking ASOP # 38 – Using Models Outside the Actuary’s Area of Expertise ASOP # 38 – Using Models Outside the Actuary’s Area of Expertise ASOP # 39 Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking ASOP # 39 Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking

11. Actuarial Standard of Practice # 12 Risk Classification (for All Practice Areas) 3.2.1 Consider the interdependence of Risk Characteristics and Expected Outcomes (such as cost) 3.2.1 Consider the interdependence of Risk Characteristics and Expected Outcomes (such as cost) 3.2.2 An established cause and effect relationship is not necessary 3.2.2 An established cause and effect relationship is not necessary 3.2.3 You should select risk characteristics that are capable of being objectively determined 3.2.3 You should select risk characteristics that are capable of being objectively determined 3.4 Test the Risk Classification System using emerging experience 3.4 Test the Risk Classification System using emerging experience

12. Question #2 True or False: An established cause and effect relationship is necessary for ASOP #12 Risk Classification for All Practice Areas True or False: An established cause and effect relationship is necessary for ASOP #12 Risk Classification for All Practice Areas TRUE TRUE FALSE FALSE

13. Answer #2 True is an Incorrect Answer True is an Incorrect Answer Press to retake Question #2

14. Answer #2 The correct answer is False: The correct answer is False: An established cause and effect relationship is not necessary since the task force recognized that there can be significant relationships between risk characteristics and expected outcomes where a cause-and-effect relationship cannot be demonstrated. An established cause and effect relationship is not necessary since the task force recognized that there can be significant relationships between risk characteristics and expected outcomes where a cause-and-effect relationship cannot be demonstrated.

15. Actuarial Standard of Practice # 13 Trending Procedures in Property/Casualty Insurance 3.1 You should identify the intended purpose or use of the trending procedure: ratemaking, reserving, valuations, underwriting, and/or marketing. 3.1 You should identify the intended purpose or use of the trending procedure: ratemaking, reserving, valuations, underwriting, and/or marketing. 3.2 The data can consist of historical insurance or non-insurance information. 3.2 The data can consist of historical insurance or non-insurance information. 3.3 Consider economic and social influences 3.3 Consider economic and social influences

16. Actuarial Standard of Practice # 25 Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages 3.2 Consider various methods of determining credibility. 3.2 Consider various methods of determining credibility. 3.3 Carefully select related experience to be blended with the subject experience; it should have frequency, severity, or other determinable similar characteristics 3.3 Carefully select related experience to be blended with the subject experience; it should have frequency, severity, or other determinable similar characteristics 3.4 Informed Actuarial Judgment — The use of credibility procedures is not always a precise mathematical process. 3.4 Informed Actuarial Judgment — The use of credibility procedures is not always a precise mathematical process.

17. Question #3 Which statement is not contained in ASOP #13, Trending Procedures in Property/Casualty Insurance, nor ASOP #25, Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages: Which statement is not contained in ASOP #13, Trending Procedures in Property/Casualty Insurance, nor ASOP #25, Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages: A. You should identify the intended purpose or use of the trending procedure: ratemaking, reserving, valuations, underwriting, and/or marketing. A. You should identify the intended purpose or use of the trending procedure: ratemaking, reserving, valuations, underwriting, and/or marketing. B. Consider various methods of determining credibility. B. Consider various methods of determining credibility. C. Carefully select related experience to be blended with the subject experience; it should have frequency, severity, or other determinable similar characteristics C. Carefully select related experience to be blended with the subject experience; it should have frequency, severity, or other determinable similar characteristics D. You should avoid actuarial judgment in favor of a specified mathematical process D. You should avoid actuarial judgment in favor of a specified mathematical process

18. Answer #3 A is an Incorrect Answer A is an Incorrect Answer Press to retake Question #3

19. Answer #3 B is an Incorrect Answer B is an Incorrect Answer Press to retake Question #3

20. Answer #3 C is an Incorrect Answer C is an Incorrect Answer Press to retake Question #3

21. Answer #3 The correct answer is D: The correct answer is D: Informed actuarial judgment is requested because the use of credibility procedures is not always a precise mathematical process. Informed actuarial judgment is requested because the use of credibility procedures is not always a precise mathematical process.

22. Actuarial Standard of Practice # 29 Expense Provisions in Property/Casualty Insurance Ratemaking 3.2 + 3.6 You should determine provisions for projected: 3.2 + 3.6 You should determine provisions for projected: loss adjustment expenses (3.2) loss adjustment expenses (3.2) commission and brokerage fees (3.2) commission and brokerage fees (3.2) other acquisition expenses (3.2) other acquisition expenses (3.2) general administrative expenses (3.2) general administrative expenses (3.2) taxes, licenses, and fees (3.2) taxes, licenses, and fees (3.2) provision for residual market and statutory assessments (3.6) provision for residual market and statutory assessments (3.6) 3.3 + 3.5 + 3.7 You may also: 3.3 + 3.5 + 3.7 You may also: amortize start-up costs amortize start-up costs add provision for policyholder dividends add provision for policyholder dividends include the cost of Reinsurance include the cost of Reinsurance

23. Actuarial Standard of Practice # 30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking 3.5 You should consider two elements of investment income: 3.5 You should consider two elements of investment income: investment income from insurance operations investment income from insurance operations investment income on capital investment income on capital 3.7 You should include a contingency provision if the assumptions used in the ratemaking process produce cost estimates that are not expected to equal average actual costs 3.7 You should include a contingency provision if the assumptions used in the ratemaking process produce cost estimates that are not expected to equal average actual costs

24. Actuarial Standard of Practice # 38 Using Models Outside the Actuary’s Area of Expertise 3.1 You should do all of the following when using models that incorporate specialized knowledge outside of your own area of expertise: 3.1 You should do all of the following when using models that incorporate specialized knowledge outside of your own area of expertise: a. determine appropriate reliance on experts; a. determine appropriate reliance on experts; b. have a basic understanding of the model; b. have a basic understanding of the model; c. evaluate whether the model is appropriate for the intended application; c. evaluate whether the model is appropriate for the intended application; d. determine that appropriate validation has occurred; and d. determine that appropriate validation has occurred; and e. determine the appropriate use of the model. e. determine the appropriate use of the model.

25. Question #4 Which of the following do you NOT need to do when using models that incorporate specialized knowledge outside of your own area of expertise : Which of the following do you NOT need to do when using models that incorporate specialized knowledge outside of your own area of expertise : A. determine appropriate reliance on experts A. determine appropriate reliance on experts B. have a thorough understanding of the model B. have a thorough understanding of the model C. evaluate whether the model is appropriate for the intended application C. evaluate whether the model is appropriate for the intended application D. determine that appropriate validation has occurred D. determine that appropriate validation has occurred E. determine the appropriate use of the model E. determine the appropriate use of the model

26. Answer #4 A is an Incorrect Answer A is an Incorrect Answer Press to retake Question #4

27. Answer #4 C is an Incorrect Answer C is an Incorrect Answer Press to retake Question #4

28. Answer #4 D is an Incorrect Answer D is an Incorrect Answer Press to retake Question #4

29. Answer #4 E is an Incorrect Answer E is an Incorrect Answer Press to retake Question #4

30. Answer #4 The correct answer is B: The correct answer is B: You do not necessarily have to have a thorough understanding of the model; you must have a basic understanding though You do not necessarily have to have a thorough understanding of the model; you must have a basic understanding though

31. Actuarial Standard of Practice # 39 Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking 3.3.1 When using historical insurance data you should: 3.3.1 When using historical insurance data you should: Consider data applicability Consider data applicability Adjust to reflect future conditions Adjust to reflect future conditions Modify it to stabilize outcomes and reduce sensitivity Modify it to stabilize outcomes and reduce sensitivity Vary trends where necessary Vary trends where necessary 3.3.2 You should consider using catastrophe models if the available historical data doesn’t represent the exposure 3.3.2 You should consider using catastrophe models if the available historical data doesn’t represent the exposure

32. RATEMAKING ACTUARIAL STANDARDS OF PRACTICE ASOP # 12 Risk Classification (for All Practice Areas) ASOP # 12 Risk Classification (for All Practice Areas) ASOP # 13 Trending Procedures in Property/Casualty Insurance ASOP # 13 Trending Procedures in Property/Casualty Insurance ASOP # 25 Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages ASOP # 25 Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages ASOP # 29 Expense Provisions in Property/Casualty Insurance Ratemaking ASOP # 29 Expense Provisions in Property/Casualty Insurance Ratemaking ASOP # 30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking ASOP # 30 Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking ASOP # 38 – Using Models Outside the Actuary’s Area of Expertise ASOP # 38 – Using Models Outside the Actuary’s Area of Expertise ASOP # 39 Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking ASOP # 39 Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking

33. CONGRATULATIONS You have successfully completed this session on the Ratemaking ASOPs