CAS Exam 7 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Expected loss ratio method

Ultimate losses are earned premium multiplied by a selected loss ratio. Used when premium is credible but loss experience is immature or disrupted by a program change.

Chain-ladder development factor

Age-to-age factor equals cumulative losses at the later age divided by cumulative losses at the earlier age, summed across years; the product of factors to ultimate gives the age-to-ultimate factor.

Bornhuetter-Ferguson method

Ultimate equals reported losses plus expected ultimate losses times the unreported percentage, where unreported percentage is one minus the reciprocal of the age-to-ultimate factor.

Cape Cod method

A Bayesian-flavored blend that estimates the a priori loss ratio from the data as total reported losses divided by total expected reported losses, then applies Bornhuetter-Ferguson projection logic.

Mack standard error

A distribution-free estimate of chain-ladder prediction error combining process variance from future development and parameter variance from estimating development factors, assuming independence across accident years.

Berquist-Sherman adjustment

A restatement of historical reported losses for changes in case reserve adequacy, or of premium for rate-level changes, before applying a projection method to avoid distorted development patterns.

Frequency-severity projection

Ultimate losses are projected as expected claim counts multiplied by expected average severity, with each component selected separately and trended to the future cost level.

Case reserves versus IBNR

Case reserves are established for known claims; IBNR covers unreported claims plus development on known claims. Total reserves equal case reserves plus IBNR.

Reported-to-ultimate percentage

The reciprocal of the age-to-ultimate development factor; it measures how much of ultimate losses is expected to be reported by the current evaluation date.

Implied loss ratio test

A reasonableness check comparing selected ultimates to earned premium by accident year; an implied loss ratio pattern inconsistent with pricing and trend signals a suspect selection.

Paid-to-incurred ratio

Paid losses divided by incurred losses at a given age. A declining ratio may indicate strengthening case reserves rather than genuine development slowdown.

Discounting loss reserves

Reserves are discounted by dividing each expected payment by one plus the interest rate raised to the payment period; the payout pattern and rate must be documented.

Reserve strengthening effect

An increase in carried reserves for prior accident years raises calendar-year incurred losses but does not change the true ultimate for those years; it distorts calendar-year trends.

Reserve adequacy range

A comparison of carried reserves against multiple indicated estimates; a carried amount below the actuary's best estimate represents a deficiency requiring disclosure or remediation.

Unearned premium valuation

Economic value of unearned premium equals unearned premium net of acquisition expenses minus the present value of expected losses and maintenance expenses on the unexpired term.

Risk margin in fair value

Compensation a market participant would require for bearing non-hedgeable reserve risk; it is distinct from a statutory prudence margin and is added to the expected cash flow estimate.

Reinsurance recoverable valuation

Ceded reserves are recognized net of collectibility risk; reinsurer credit quality, collateral, and dispute risk reduce the economic value of the recoverable below its face amount.

Return on allocated capital

Underwriting profit plus allocated investment income divided by capital allocated to the segment; allocation should reflect each segment's contribution to overall risk.

Surplus note valuation

Surplus notes are valued as debt-like instruments, considering subordination, mandatory versus optional interest deferral, and the need for regulatory approval of principal and interest payments.

Calendar-year versus accident-year

Calendar-year results combine current accident-year losses with changes in prior-year reserves; accident-year results isolate the ultimate cost of each exposure period.

Investment income allocation

Investment income earned on reserves and capital is allocated to lines or years, typically using an assumed payment pattern and yield, and affects indicated rate levels.

Economic capital

The capital required to absorb unexpected losses at a chosen confidence level over a specified horizon, reflecting the insurer's own risk profile rather than regulatory formulas.

Value at Risk

The loss amount not exceeded with a stated probability over a horizon. It is not subadditive, so combining portfolios can appear to increase measured risk.

Tail Value at Risk

The average loss conditional on losses exceeding the Value at Risk threshold; it is subadditive and therefore coherent, making it preferred for tail risk aggregation.

Diversification benefit

The reduction in aggregate risk relative to the sum of standalone risks, arising from imperfect correlation; computed as the difference between the sum and the combined measure.

Copula tail dependence

A copula specifies dependence between marginal distributions; the Gaussian copula has zero tail dependence while the t copula exhibits joint tail dependence, altering extreme-loss estimates.

Reverse stress test

A test that identifies scenarios severe enough to exhaust capital or breach solvency, working backward from failure to reveal vulnerabilities that forward stress tests may miss.

Risk appetite versus tolerance

Risk appetite is the high-level statement of risk the insurer accepts; tolerances are quantified boundaries, and limits are operational thresholds with escalation triggers.

Chief risk officer independence

Effective ERM places the chief risk officer outside profit-center reporting lines, with direct access to the board or its risk committee and authority to escalate limit breaches.

Exceedance probability curve

A catastrophe model output showing the probability that annual or occurrence losses exceed a given amount; it yields average annual loss and probable maximum loss at selected return periods.

Operational risk

Risk of loss from inadequate or failed internal processes, people, systems, or external events; it includes legal, compliance, and fraud losses and is typically modeled via scenarios and frequency-severity.

Liquidity risk

The risk that the insurer cannot meet obligations when due without incurring unacceptable losses, including the need to sell assets at depressed prices during stress.