CAS Exam 5 key terms

The expected loss and loss adjustment expense cost per exposure unit, computed by dividing total losses by total exposures. It excludes fixed expenses and profit, so it is a building block rather than a final rate.

Incurred losses and loss adjustment expenses divided by earned premium for the same period. It measures the share of premium consumed by losses and is used both to project rate need and to compare experience.

The portion of each premium dollar available for losses and loss adjustment expenses after variable expenses, fixed expenses, and profit are removed. It equals one minus the expense and profit provision and converts rate need into a loss-ratio target.

The loss ratio a rate filing is designed to produce, derived from the permissible loss ratio and used to judge whether indicated rates are adequate. Actual experience above the target signals inadequate rates.

The unit over which losses are spread when computing pure premium, such as car-years, payroll per hundred dollars, or sales per thousand. Choosing it well means the unit should track expected loss frequency and severity.

The unit by which rates are expressed and charged, such as payroll per hundred or value per hundred. It often matches the exposure base but may differ when marketing or regulatory conventions require it.

The price per unit of exposure charged for insurance coverage, expressed in dollars per exposure unit. Rate times exposure gives premium before any individual risk modifications.

Premium computed by multiplying the manual rate by the exposure amount for a risk, before any experience rating, schedule rating, or other individual risk adjustment. It reflects class averages rather than the specific insured.

Historical premium restated to current rate levels so that losses and premium from different periods become comparable. It is produced by applying cumulative rate change factors to the premium as written or earned.

The adjustment that moves historical premium to the level expected during the policy period being priced, reflecting shifts in exposure mix or average premium per unit not caused by rate changes.

The projected movement over time in claim frequency and severity, used to bring historical losses to the cost level expected in the future policy period. It is often expressed as an annual percentage.

The percentage difference in rates between two effective periods, measured on comparable exposure. It is used to on-level premium and to communicate the size of a filing.

The estimated percentage adjustment to current rates needed to reach an adequate level, computed by comparing projected losses and expenses to projected premium at current rates.

The portion of the rate dollar allocated to expenses other than losses, split into variable costs such as commissions that move with premium and fixed costs such as overhead that do not.

An expense that does not vary with premium volume over the relevant range, such as certain administrative salaries or systems costs. It is typically converted to a per-exposure amount before inclusion in rates.

A cost that changes roughly in proportion to premium or exposure, such as commissions, premium taxes, or certain fees. It is usually expressed as a percentage of premium in the rate calculation.

The estimated loss and loss adjustment expense per exposure unit, often supplied by a statistical bureau or advisory organization. Insurers add their own expense and profit loads to derive final rates.

A factor applied to advisory loss costs to cover the insurer's own expenses, taxes, and profit, producing the insurer's final rate. It equals roughly one divided by the permissible loss ratio.

A factor applied to manual premium based on a risk's own past loss experience relative to the class average, rewarding better-than-average risks and surcharging worse ones. It is most stable for larger risks.

A judgmental adjustment to premium in which individual risk characteristics such as housekeeping or safety features are debited or credited against a standard. It complements rather than replaces experience-based adjustments.

Setting a rate primarily from the underwriter's informed estimate of expected losses and expenses for a particular risk, used where credible class data are unavailable. It relies on expertise rather than statistical averages.

The weight given to a risk's or group's own experience relative to a broader complement, reflecting how much data volume and stability support the observed result. Higher credibility means experience drives the estimate more strongly.

The number between zero and one assigned to observed experience in a weighted average with a complement. It rises with the amount of exposure or claim count supporting the observation.

The portion of an estimate not assigned to the subject experience, taken from a related class, statewide average, or other benchmark. Its weight equals one minus the credibility factor.

A limited-fluctuation method that sets credibility as exposure or claim count divided by that quantity plus a stability parameter, so credibility approaches one as data accumulate. The parameter reflects variation between risks relative to within-risk variation.

The change in estimated ultimate losses for a group of claims as additional information emerges over time. Actuaries measure it with development factors applied to reported or paid amounts.

A ratio of cumulative losses at a later maturity age to cumulative losses at an earlier age, used to project immature amounts to ultimate. Factors are commonly derived from historical triangles and may be smoothed or selected.

A table of cumulative losses by accident period and maturity age, arranged so each row shows a cohort at successive evaluations. It reveals development patterns and supports selection of age-to-age factors.

The adjuster's estimate of the remaining cost to settle a reported claim, recorded claim by claim and revised as facts change. It covers expected payments plus the cost of future handling.

Estimated losses for claims that have occurred but have not yet been reported to the insurer as of the valuation date. These reserves are typically projected from reporting patterns and expected ultimate frequency.

A claim that has been communicated to the insurer by the insured or a third party and entered into the claims system. Reported counts and amounts feed both case reserving and development analysis.

The final estimated total cost of all claims from a given accident period after all development has emerged. It combines paid amounts, case reserves, and provisions for unreported claims.

An aggregate provision for expected claim costs not assigned to individual claims, such as unreported claims, reopened claims, or claims handling expenses. It sits alongside case reserves in the total reserve estimate.

The calendar year in which a loss event occurs, regardless of when the policy was written or the claim reported. It groups losses so that development can be tracked on a consistent basis.

The year in which a policy takes effect, grouping all losses arising under policies written in that year. It differs from accident year when policies straddle calendar years and is useful for pricing analysis.

The calendar year in which a claim is first reported to the insurer, independent of when the loss occurred. It is used to study reporting lags and to estimate unreported claim liabilities.

A reserving technique that projects ultimate losses by multiplying cumulative paid losses by selected age-to-ultimate development factors. It is simple and reliable where payment patterns are stable.

A reserving technique that projects ultimate losses from cumulative incurred amounts, including case reserves, using development factors. It responds faster to emerging severity but can be distorted by reserve strengthening or weakening.

A reserving approach that estimates ultimate losses by applying an expected loss ratio to earned premium for each period. It is useful for immature years where development data are thin but requires a credible expected ratio.

A reserving technique that blends reported experience with an expected loss estimate, weighting each by the proportion of ultimate losses still unreported. It stabilizes results for immature periods and limits reaction to early outliers.

A development approach that applies selected age-to-age factors cumulatively to the latest diagonal of a triangle to estimate ultimate losses. It assumes past development patterns continue and uses no separate expected loss input.

Claim-handling costs that cannot be tied to specific claims, such as claims department salaries and systems. It is estimated separately and added to loss reserves, often as a percentage of losses or a per-claim amount.

The cost of investigating, defending, and settling claims, split into allocated expenses tied to specific claims and unallocated expenses that support claims operations generally. It is reserved alongside losses.