Cass Chapter 10

[Examinator]

Can someone explain commutation to me, or tell me if I'm understanding this concept correctly? It seems to me that if an insurer and a reinsurer agree to commute a (group of) claim(s), they agree on an amount of liability before it's actually settled, the reinsurer pays up, and then no further adjustments are made based on how the outstanding claims settle. It seems like this would only happen if the claims weren't volatile or anything like that. Am I close?

[Examinator]

Another question here, though the first is still outstanding.

I'm working through the XOL exposure rating section, and it seems to make sense. Two similar past exam problems seem, at least to me, to be treated differently with respect to ALAE. They are 2002 #38 and 2003 #40. In the text, it says that ISO ILFs do not contain a load for ALAE, so a load for ALAE will have to be added back in the computation. Understood. In both problems an ALAE load factor is given. It's only used in one of the problems, and the solution to the other says that it's assumed that an ALAE load is contained in the ILFs. Why does it hold in one situation and not in the other? Should I just state that assumption in the problem and work it from there, resulting in two potentially correct answers?

[J.T.]

Another question here, though the first is still outstanding.

I'm working through the XOL exposure rating section, and it seems to make sense. Two similar past exam problems seem, at least to me, to be treated differently with respect to ALAE. They are 2002 #38 and 2003 #40. In the text, it says that ISO ILFs do not contain a load for ALAE, so a load for ALAE will have to be added back in the computation. Understood. In both problems an ALAE load factor is given. It's only used in one of the problems, and the solution to the other says that it's assumed that an ALAE load is contained in the ILFs. Why does it hold in one situation and not in the other? Should I just state that assumption in the problem and work it from there, resulting in two potentially correct answers?
If you look at 40, you'll notice that the ILF's are calculated using the ALAE (1.18 = (11,000+1,980)/(10,000+1000).

That's why they aren't using the ALAE factor.

I would state the assumption either way tho, and you'll likely not lose a full point from the problem.

[Examinator]

If you look at 40, you'll notice that the ILF's are calculated using the ALAE (1.18 = (11,000+1,980)/(10,000+1000).

That's why they aren't using the ALAE factor.

I would state the assumption either way tho, and you'll likely not lose a full point from the problem.Kind of sneaky, but all in all fair. Thanks for the insight.

[root4unc]

Can someone explain commutation to me, or tell me if I'm understanding this concept correctly? It seems to me that if an insurer and a reinsurer agree to commute a (group of) claim(s), they agree on an amount of liability before it's actually settled, the reinsurer pays up, and then no further adjustments are made based on how the outstanding claims settle. It seems like this would only happen if the claims weren't volatile or anything like that. Am I close?

A commutation essentially breaks the insurance relationship. When an insurer and reinsurer commute for $X, that is all the reinsurer will ever have to pay for claims arising from the commuted contracts. This is very common for reinsurers which are insolvent.

[Examinator]

A commutation essentially breaks the insurance relationship. When an insurer and reinsurer commute for $X, that is all the reinsurer will ever have to pay for claims arising from the commuted contracts. This is very common for reinsurers which are insolvent.So, I was pretty close. Thanks.

[JAS]

What does ECO and XPL stand for?

[2M]

What does ECO and XPL stand for?


ECO = Extra Contractual Obligations


XPL = Excess Of Policy Limits

[The Sad Man]

Man, you guys were on reinsurance way back in August? How the hell do you do this? In October, I hope to learn all the reinsurance/accounting and nail down the reserving topics. This is going to be one intense ride.

[Examinator]

It's not that impressive. I read through all the material at a surface level. My two objectives were to make sure I understood it, and make sure I can work the problems. Make note cards, forget it, and move to the next paper. Now I'm going back through it all.

[Mel-o-rama]

Kind of sneaky, but all in all fair. Thanks for the insight.
Yes: Sneaky.

Debatable: Fair. I wish they would stick to the syllabus.

Thanks for the explanation about the ALAE, though.

[Purple Princess]

What does ECO and XPL stand for?

I was wondering what ECO and XPL where too, but then I found this extremely useful document online (read pages 4-7)
http://www.casact.org/pubs/forum/97spforum/97spf179.pdf

[Levin]

Yes: Sneaky.

Debatable: Fair. I wish they would stick to the syllabus.

Thanks for the explanation about the ALAE, though.
I have a hard time liking 2003 #40. They threw a combination of poorly-labeled and extraneous information at you, and left you to fill in the blanks. The question, in a small way, teaches a bad lesson about how to proceed when data is unclearly labeled.

In reality, of course, you wouldn't just look at the supporting data and conclude that the ILFs were Loss + ALAE. It would suggest such, of course. But you would not be satisfied with this and look at the documentation of the data, assuming that ASOP 9 was being followed, or you would ask someone who was involved in compiling the data. That kind of question should be treated more like detective work than a Mensa puzzle.

On the other hand, this type of question, precisely because it requires a different approach than would be applied in actuarial work, reminds us to use judgment in applying what we learned on the syllabus to real work.