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PRICE MONITOR Practical Considerations

PRICE MONITOR Practical Considerations. Casualty Actuarial Society 2005 Ratemaking Seminar John Ferraro FCAS, MAAA Philadelphia Insurance Companies. Price Monitor. Price Monitor Formulas Price Monitor Data Collection Price Monitor Reporting. Price Monitor Formulas. Renewal Report

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PRICE MONITOR Practical Considerations

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  1. PRICE MONITOR Practical Considerations Casualty Actuarial Society 2005 Ratemaking Seminar John Ferraro FCAS, MAAA Philadelphia Insurance Companies

  2. Price Monitor • Price Monitor Formulas • Price Monitor Data Collection • Price Monitor Reporting

  3. Price Monitor Formulas • Renewal Report • Standard Report • Benchmark Report

  4. Price Monitor Formulas • Renewal Report • Calculate rate changes on expiring coverage • Adjusts renewal premium to expiring coverage level • Adjustment to expiring limit and deductible. • Calculations not affected by exposure changes • Comparison of renewal and expiring rates not premium

  5. Renewal Report Formulas • Normalization Factor = Current Factors at Renewal Level Current Factors at Expiring Level • Normalized Renewal Premium = Renewal Premium Normalization Factor • Normalized Renewal Rate = Normalized Renewal Premium Renewal Exposures • Expiring Rate = Expiring Premium / Expiring Exposures • Rate Change % = Normalized Renewal Rate / Expiring Rate - 1 • Rate Change Premium = Rate Change % x Expiring Premium

  6. Renewal Report Example

  7. Price Monitor Formulas • Standard Report • Measures judgment modification usage (e.g. Schedule Credits / Debits) • May include Experience Modification • As counter-balance to Schedule and IRPM mods

  8. Standard Report Formulas • Standard Premium = Charged Premium Product of Judgment Modifications • Average Judgment Modifications = Sum of Charged Premium Sum of Standard Premium

  9. Price Monitor Formulas • Benchmark Report • Comparison of Final Rates rates across years or to a benchmark

  10. Benchmark Report Formulas Benchmark Normalizing Factor (BNF) = Factor reflecting Policy coverage relative to a common coverage Normalized Exposure Base = Exposures x BNF Global Benchmark Rate = Sum of Charged Premium Sum of Normalized Exposure Base Policy Level Benchmark Premium = Global Benchmark Rate x Policy’s BNF x Exposures Ratio to Benchmark = Charged Policy Premium Policy Level Benchmark Premium

  11. Benchmark Report Example

  12. Price Monitor Formulas Renewal & Benchmark Normalizing Factors • Pertinent to premium determination • Available & Reliable • Examples • GL – ILF, deductible, term • Auto Liability – ILF, deductible, term • Fire Building – deductible, coinsurance, inflation guard, agreed amount, replacement

  13. Price Monitor Data Collection • Matching Pricing to Reporting records • Reasons Premiums may not be monitored

  14. Price Monitor Data Collection Matching of Pricing to Reporting • Pricing records are at a very detailed level (vehicle, location, building, etc…). • Pricing records on in-force basis. • Reporting records are summarized and transaction based • Summarized to class, territory, coverage levels • Includes mid-term end., short-term coverage, cancellations • Coverage term not policy term basis • Pricing fields must be adjusted, summed, or averaged to the Reporting record level.

  15. Price Monitor Data CollectionReasons Premiums not Monitored • Unable to match Pricing records to Reporting records. • Pricing premium does not tie to Reporting premium. • Miscoded Pricing records • Pricing records lack detail needed for calculations (e.g. external rating – umbrella, boiler & machine) • Rates based on underwriter’s judgment (e.g. a-rated GL, inland marine) • Exclude records or policies that distort the final report. (e.g. problems averaging pricing factors) • Exclusion of insignificant coverages.

  16. Price MonitorReporting • Reporting Basics • Price Monitor Reports • Price Monitor Premium to Reporting Premium Report • Additional Uses of Data

  17. Reporting Basics • Price Monitor calculation fields are on a dollar basis to aid in averaging later. • The records may not pass into all the Reports • New policies would not reach Renewal Report • Different fields needed for calculations • Results may be counter intuitive • e.g. Rate Increase with declining Judgment Mod

  18. Price Monitor Reports • Senior Management Reports • Year / Quarter / Month • Line / Coverage • New vs. Renewal • Market Segment • Field & Market Segment Manager Reports • Region / Branch Office / Underwriter • State • Policy • Price Monitor vs. Reporting Premium Report

  19. Price MonitorPrice Monitor vs. Reporting Report • Demonstrates how much reported premium is being monitored. • Provides general description of pockets not monitored. • Identify blind spots or changes in book • Satisfy internal control requirements in Sarbanes-Oxley

  20. Pricing Monitor Data Other Uses • Provides detailed changes for on-level calculations. • Territory and class analysis • Only renewed coverages may be considered • Detailed Rate Effect calculations • Underlying rates, factors and exposures readily available • Enhance understanding of rating practices. • Completion of filing forms • Use of Judgment Modification in Experience Exhibits • Assist in explaining effect of schedule mod usage on profitability • Assist in developing loss ratio projections.

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