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CAS Seminar on Ratemaking

CAS Seminar on Ratemaking. Basic Techniques for an Overall Rate Level Indication (INT-2) March 7, 2002 The Tampa Marriott Waterside Tampa, Florida Presented by: Charles Parsons, FCAS, MAAA & Linda Torkelson, FCAS, MAAA. Basic Techniques Overall Rate Level Indication (INT-2).

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CAS Seminar on Ratemaking

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  1. CAS Seminar on Ratemaking Basic Techniques for an Overall Rate Level Indication (INT-2) March 7, 2002 The Tampa Marriott Waterside Tampa, Florida Presented by: Charles Parsons, FCAS, MAAA & Linda Torkelson, FCAS, MAAA

  2. Basic TechniquesOverall Rate Level Indication (INT-2) Basic Ratemaking Equation and Its Considerations: • Organization of Data • Premium Adjustments • Loss Adjustments • Expense Considerations • Other Considerations

  3. Basic Ratemaking Equation: Future Premiums= Future Losses + Future Expenses + Underwriting Profit and Contingency Provision

  4. BASIC RATEMAKING METHODS • Pure Premium (PP) Method • PP = Loss / Exposure Units • develops indicated rate per unit of exposure (R) • R = [PP + FE] / [1-VER-Profit Ratio] • Loss Ratio Method • develops indicated rate change (A) • A = Experience LR / Target LR NOTE: THE TWO METHODS PRODUCE IDENTICAL RESULTS WHEN IDENTICAL DATA AND ASSUMPTIONS ARE USED.

  5. ORGANIZATION OF DATA I. CALENDAR YEAR DATA (standard accounting year) II. POLICY YEAR DATA III. ACCIDENT YEAR DATA

  6. ORGANIZATION OF DATA I. CALENDAR YEAR DATA Premium and Loss transactions that occur during the year. Loss = Payments + change in reserves duringyear • Matches financial statements • Data available quickly, least time lag in development • Never changes after it is calculated at the end of a year. • Premium and Loss transactions DO NOT match • Reserve changes from prior years can distort the reliability of the data for ratemaking and management purposes.

  7. ORGANIZATION OF DATA II. POLICY YEAR DATA Premium and Loss transactions on policies with effective dates (new or renewal) during the year. Loss = Payments + Reserves • Premium and Loss transactions DO match • Transactions from policies effective in prior years do not distort the data for ratemaking • Data with the greatest time lag (not available until one term after end of the year.) • Exact ultimate losses cannot be finalized until all losses settled.

  8. ORGANIZATION OF DATA III. ACCIDENT YEAR DATA Loss transactions for accidents occurring during the year. Premium transaction during the same 12 months. Loss = Payments + Reserves • Premium and Loss transactions generally match • Transactions from accidents occurring in prior years do not distort the data for ratemaking • Data with slight time lag • Exact ultimate losses cannot be finalized until all losses settled.

  9. SAMPLE RATE LEVEL INDICATIONASSUMPTIONS • Annual Policies. Rates to be revised as of JANUARY 1, 2002 • Loss Ratio Methodology • EXPERIENCE PERIOD: ACCIDENT YEAR 2000 • 2000 Earned Premium $3,690,000 • Reported Incurred Losses as of 12/31/00: $1,700,000 2000 2001 2002 2003 Experience Policies Period Effective <COVERAGE PROVIDED> Avg. Accident Avg.. Accident Date under Date is 7/1/00 Revised Rates is 1/1/2003 TREND PERIOD is 2.50 Years

  10. LOSSRATIOMETHODOLOGYFixed Expense Approach INDICATED (needed) RATE LEVEL CHANGE = Projected Experience Loss + Fixed Expense Ratio Expected (Target) Loss + Fixed Expense Ratio - 1.0 For Example: 76.5% 74.7% - 1.0 = + 2.4%

  11. LOSSRATIOMETHODOLOGYExperience Loss + Fixed Expense Ratio Projection • Premium Adjustments • Adjust to Current Rate Level • Premium Trend • Coverage Drift • Loss Adjustments • Loss Development • Loss Trend • Deductible Adjustments • Catastrophe Adjustments

  12. RATE INDICATION WORKSHEET Loss Ratio Methodology - Fixed Expense Approach • A. EXPERIENCE Loss + Fixed Expense Ratio = (9 + 11) / (4). . . . . . . . . . . . . • (1) 2000 Earned Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (2) Current Rate Level Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (3) Premium Trend Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (4) Trended Premium @ Current Rate Level = (1)*(2)*(3).. . . . . . . . . . • (5) Accident Year 2000 Ultimate Losses. . . . . . . . . . . . . . . . . . . . . . . . . . • (6) Allocated Loss Adjustment Expense (ALAE) Factor. . . . . . . . . . . . . . • (7) Annual Loss Trend ____% Trend Period: 2.5 years • (8) Exponential Trend Factor [1.0 + (7)] ** 2.5. . . . . . . . . . . . . . . . . . . . . • (9)Trended Ultimate Losses and ALAE = (5) * (6) * (8). . . . . . . . . . . . • (10) Fixed Expense Ratio (FER). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (11)Fixed Expenses = (1) * (10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • B. EXPECTED (Target) Loss + Fixed Expense Ratio. . . . . . . . . . . . . . . . . . . . . • C. INDICATED RATE LEVEL CHANGE = (A / B) - 1.0. . . . . . . . . . . . . . .. .

  13. PREMIUM ADJUSTMENTS Current Rate Level Adjustment • Loss Ratio Method analyzes the appropriateness of the CURRENT RATES for use in the future. • CRL adjustment reflects rate changes NOT already included in historical recorded premium.

  14. PREMIUM ADJUSTMENTS Current Rate Level Adjustment - Common Techniques • Extension of Exposures • re-rate each exposure (policy) • requires extensive detail and mechanization • most accurate method • Parallelogram Method • easier method • specific policy information not required • assumes even distribution of policies written throughout the year

  15. CURRENT RATE LEVEL ADJUSTMENTExtension of Exposures Method 2000 Earned Exposures Class 1 Class 2 Territory 1 1,500 2,260 Territory 2 1,995 3,010 Territory 3 2,700 2,500 Current Rates Class 1 Class 2 Territory 1 $150 $300 Territory 2 $175 $350 Territory 3 $220 $440 Premium @ Current Rates Class 1 Class 2 Territory 1 $225,000 $678,000 Territory 2 $349,125 $1,053,500 Territory 3 $594,000 $1,100,000 Statewide total $3,999,625

  16. CURRENT RATE LEVEL ADJUSTMENT Parallelogram Method A B C 1/99 1/00 1/01 1/02 1/03 Rate Change History DateChangeRate Index From 1/1/99 to 12/31/00 None 1.000 A 1/1/00 - 5% 0.950 B (1 * 0.95) 7/1/00 + 2% 0.969 C (1 * 0.95 * 1.02) 1/1/01 + 4% 1.008 Current (1 * 0.95 * 1.02 * 1.04)

  17. CURRENT RATE LEVEL ADJUSTMENT Calculation of On-Level Factor - Parallelogram Method I. Rate Index for 2000: Percent Rate Areaof 2000Index A 50.0 1.000 B 37.5 0.950 C 12.5 0.969 TOTAL 100.0 0.977 II. On-Level Factor for 2000: (1) Current Index 1.008 (2) 2000 Index 0.977 (3) On-Level Factor (1) / (2) 1.032 (4) 2000 Earned Premium $3,690,000 (5)2000 Earned Premium @ Current Rate Level $3,808,080

  18. RATE INDICATION WORKSHEET Loss Ratio Methodology - Fixed Expense Approach • A. EXPERIENCE Loss + Fixed Expense Ratio = (9 + 11) / (4). . . . . . . . . . . . . • (1) 2000 Earned Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,690 • (2) Current Rate Level Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.032 • (3) Premium Trend Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (4) Trended Premium @ Current Rate Level = (1)*(2)*(3).. . . . . . . . . . • (5) Accident Year 2000 Ultimate Losses. . . . . . . . . . . . . . . . . . . . . . . . . . • (6) Allocated Loss Adjustment Expense (ALAE) Factor. . . . . . . . . . . . . . • (7) Annual Loss Trend _5.0__% Trend Period: 2.5 years • (8) Exponential Trend Factor [1.0 + (7)] ** 2.5. . . . . . . . . . . . . . . . . . . . . • (9)Trended Ultimate Losses and ALAE = (5) * (6) * (8). . . . . . . . . . . . • (10) Fixed Expense Ratio (FER). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (11)Fixed Expenses = (1) * (10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • B. EXPECTED (Target) Loss + Fixed Expense Ratio. . . . . . . . . . . . . . . . . . . . . • C. INDICATED RATE LEVEL CHANGE = (A / B) - 1.0. . . . . . . . . . . . . . .. .

  19. PREMIUM ADJUSTMENTS Premium Trend • To project the premium level which will exist during the period being priced due to underlying inflation sensitive exposures. • Must adjust for items such as: • Average car model year or price group • Average home value • Any item that would impact future premium or both premium and losses in the future except policy count

  20. PREMIUM ADJUSTMENTS Premium Trend / Coverage Drift • AUTO EXAMPLE - MODEL YEAR RATING Over time, the average model year and symbol will “drift” toward newer more expensive vehicles. • HOMEOWNERS EXAMPLE - EXPOSURE TREND The exposure unit used in Homeowners is the amount of insurance which is tied to the value of the home. Both of these situations will cause average premium in the projection period to be higher than in the experience period, regardless of any rate activity.

  21. PREMIUM ADJUSTMENTS Auto Premium Trend Example Annual Trend = 0.975 / 0.954 - 1 = 2.2% Total Trend Factor = 1.022 ^ 2.5 = 1.056

  22. RATE INDICATION WORKSHEET Loss Ratio Methodology - Fixed Expense Approach • A. EXPERIENCE Loss + Fixed Expense Ratio = (9 + 11) / (4). . . . . . . . . . . . . • (1) 2000 Earned Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,690 • (2) Current Rate Level Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.032 • (3) Premium Trend Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.056 • (4) Trended Premium @ Current Rate Level = (1)*(2)*(3).. . . . . . . . . .4,021 • (5) Accident Year 2000 Ultimate Losses. . . . . . . . . . . . . . . . . . . . . . . . . . • (6) Allocated Loss Adjustment Expense (ALAE) Factor. . . . . . . . . . . . . . • (7) Annual Loss Trend ______% Trend Period: 2.5 years • (8) Exponential Trend Factor [1.0 + (7)] ** 2.5. . . . . . . . . . . . . . . . . . . . . • (9)Trended Ultimate Losses and ALAE = (5) * (6) * (8). . . . . . . . . . . . • (10) Fixed Expense Ratio (FER). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (11)Fixed Expenses = (1) * (10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • B. EXPECTED (Target) Loss + Fixed Expense Ratio. . .. . . . . . . . . . . . . . . . . . . • C. INDICATED RATE LEVEL CHANGE = (A / B) - 1.0. . . . . . . . . . . . . . .. .

  23. LOSS ADJUSTMENTS DEDUCTIBLES • Changes in deductible distort experience • Automobile Physical Damage • Review each deductible separately, or • Adjust to a common basis, or • Reflect deductible shift in trend factors • Homeowners • Add amount of deductible back to each loss

  24. LOSS ADJUSTMENTS CATASTROPHES • Catastrophes should be eliminated from losses • Average provision should be used as a loss loading • Provision for catastrophes should be included in the profit load

  25. LOSS ADJUSTMENTS Loss Development Analysis • Adjust historical losses to an expected ULTIMATE value • Reflects revisions to claim values as claims are settled • MUST be used with policy and accident year data • Reflects IBNR reporting. • Reflects development on reported claims. • Key Factors for Consideration • Observation of historical patterns • Incurred and Paid developments • Development period

  26. Accident Year Loss Development Analysis INCURRED METHOD - Recognizes SYSTEMATIC inaccuracy of case reserves INCURRED LOSSES - Adjusted for Deductibles and Cats, (000’s) ACCIDENT Reported as of: YEAR 12 mos 24 mos 36 mos48 mos 60 mos 72 mos 1993 1,000 1,230 1,304 1,238 1,212 1,212 1994 1,100 1,320 1,412 1,398 1,356 1,356 1995 1,200 1,488 1,562 1,514 1,498 1,496 1996 1,300 1,756 1,790 1,736 1,726 1997 1,400 1,708 1,810 1,756 1998 1,5001,800 1,926 1999 1,600 1,968 2000 1,800 Age to Age Development Factor = Incurred Loss @ Later Report Period divided by Loss @ Prior Report Period AY 1998 12 mos TO 24 mos Factor =$1,800 / $1,500 = 1.20

  27. Accident Year Loss Development Analysis INCURRED AGE-TO-AGE FACTORS ACCIDENT 12 to 24 to 36 to 48 to 60 to YEAR 24 mos 36 mos 48 mos 60 mos 72 mos 1993 1.23 1.06 0.95 0.98 1.00 1994 1.20 1.07 0.99 0.97 1.00 1995 1.24 1.05 0.97 0.99 1.00 1996 1.35 1.02 0.97 0.99 1997 1.22 1.06 0.97 19981.20 1.07 1999 1.23 2 Year Average 1.215 1.065 0.970 0.990 1.000 3 Year Average 1.217 1.050 0.970 0.983 1.000 4 Year Average 1.250 1.050 0.975 0.983 1.000 Middle 3 Last 5 1.230 1.060 0.970 0.983 1.000

  28. Accident Year Loss Development Analysis AVERAGEDAGE-TO-AGE FACTORS 12 to 24 to 36 to 48 to 60 to 24 mos 36 mos 48 mos 60 mos 72 mos 2 Year Average 1.215 1.065 0.970 0.990 1.000 3 Year Average 1.217 1.050 0.970 0.983 1.000 4 Year Average 1.250 1.050 0.975 0.983 1.000 Middle 3 Last 5 1.230 1.060 0.970 0.983 1.000 Selected Age to Age 1.230 1.055 0.970 0.985 1.000 Factor x x x x Cumulative Age to Ultimate Factor 1.240 1.008 0.955 0.985 1.000

  29. LOSS DEVELOPMENT ANALYSIS (1) (2) (3) Cumulative Estimated Accident Incurred Age to Ultimate Ultimate Loss Year Loss @ 12/00 Factor (1) * (2) 1993 1,212 1.000 1,212 1994 1,356 1.000 1,356 1995 1,496 1.000 1,496 1996 1,726 1.000 1,726 1997 1,756 0.985 1,730 1998 1,926 0.955 1,839 1999 1,968 1.008 1,984 2000 1,800 1.240 2,232

  30. RATE INDICATION WORKSHEET Loss Ratio Methodology - Fixed Expense Approach • A. EXPERIENCE Loss + Fixed Expense Ratio = (9 + 11) / (4). . . . . . . . . . . . . • (1) 2000 Earned Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,690 • (2) Current Rate Level Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.032 • (3) Premium Trend Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.056 • (4) Trended Premium @ Current Rate Level = (1)*(2)*(3).. . . . . . . . . .4,021 • (5) Accident Year 2000 Ultimate Losses. . . . . . . . . . . . . . . . . . . . . . . . . . 2,232 • (6) Allocated Loss Adjustment Expense (ALAE) Factor. . . . . . . . . . . . . . • (7) Annual Loss Trend ______% Trend Period: 2.5 years • (8) Exponential Trend Factor [1.0 + (7)] ** 2.5. . . . . . . . . . . . . . . . . . . . . • (9)Trended Ultimate Losses and ALAE = (5) * (6) * (8). . . . . . . . . . . . • (10) Fixed Expense Ratio (FER). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (11)Fixed Expenses = (1) * (10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • B. EXPECTED (Target) Loss + Fixed Expense Ratio. . .. . . . . . . . . . . . . . . . . . . • C. INDICATED RATE LEVEL CHANGE = (A / B) - 1.0. . . . . . . . . . . . . . .. .

  31. LOSS ADJUSTMENTS Loss Trend Analysis • Projectto the loss level predicted to exist during pricing period • Data Issues • Separate Claim frequency and Severity Trends? • Internal Vs. External Data ? • Paid, Incurred, Reported data ? • Calendar Vs. Accident year ? • Length of Historical period ? • Credibility ? • Extrapolations of Historical Data? (Least Squares Regression, Time Series, Econometric Models)

  32. LOSS TREND ANALYSIS Accident Ultimate Losses Earned Exposures Pure Year($ 000’s)(000’s)Premium 1993 1,212 13.0 $ 93.23 1994 1,356 13.2 $102.73 1995 1,496 13.3 $112.48 1996 1,726 13.4 $128.81 1997 1,730 13.6 $127.21 1998 1,839 13.7 $134.23 1999 1,984 13.8 $143.75 2000 2,108 14.0 $150.57 Annual Trend based on Least Squares (exponential ) 6.6% Most Recent Annual Change (150.57 / 143.75) 4.7% Other Possible Trend Sources C.P.I. Medical Care Index 3 - 4% C.P.I. Auto Body Work Index 4 - 5% C.P.I. Home Maintenance & Repair Index 3 - 4%

  33. RATE INDICATION WORKSHEET Loss Ratio Methodology - Fixed Expense Approach • A. EXPERIENCE Loss + Fixed Expense Ratio = (9 + 11) / (4). . . . . . . . . . . . . • (1) 2000 Earned Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,690 • (2) Current Rate Level Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.032 • (3) Premium Trend Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.056 • (4) Trended Premium @ Current Rate Level = (1)*(2)*(3).. . . . . . . . . .4,021 • (5) Accident Year 2000 Ultimate Losses. . . . . . . . . . . . . . . . . . . . . . . . . . 2,232 • (6) Allocated Loss Adjustment Expense (ALAE) Factor. . . . . . . . . . . . . . • (7) Annual Loss Trend _5.0__% Trend Period: 2.5 years • (8) Exponential Trend Factor [1.0 + (7)] ** 2.5. . . . . . . . . . . . . . . . . . . . . 1.13 • (9)Trended Ultimate Losses and ALAE = (5) * (6) * (8). . . . . . . . . . . . • (10) Fixed Expense Ratio (FER). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (11)Fixed Expenses = (1) * (10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • B. EXPECTED (Target) Loss + Fixed Expense Ratio. . . . . . . . . . . . . . . . . .. . . . • C. INDICATED RATE LEVEL CHANGE = (A / B) - 1.0. . . . . . . . . . . . . . .. .

  34. EXPENSE LOADINGS • Loss Adjustment Expenses • Allocated • With Losses for Auto • With Unallocated for Homeowners • Unallocated • Underwriting Expenses • “Fixed” • Variable with Premium

  35. EXPENSE ANALYSIS Allocated Loss Adjustment Expenses (If NOT included with losses in loss development section) Product XYZ Countrywide Figures (in $ millions) Allocated LossALAEto IncurredAdjustmentLosses YearLossesExpensesRatio 1998 $61,200 $6,500 10.6% 1999 79,000 7,800 9.9% 2000 82,300 8,300 10.1% Estimated Future ALAE Percentage 10.0% as a percentage of Incurred Losses

  36. RATE INDICATION WORKSHEET Loss Ratio Methodology - Fixed Expense Approach • A. EXPERIENCE Loss + Fixed Expense Ratio = (9 + 11) / (4). . . . . . . . . . . . . • (1) 2000 Earned Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,690 • (2) Current Rate Level Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.032 • (3) Premium Trend Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.056 • (4) Trended Premium @ Current Rate Level = (1)*(2)*(3).. . . . . . . . . .4,021 • (5) Accident Year 2000 Ultimate Losses. . . . . . . . . . . . . . . . . . . . . . . . . . 2,232 • (6) Allocated Loss Adjustment Expense (ALAE) Factor. . . . . . . . . . . . . . 1.10 • (7) Annual Loss Trend _5.0__% Trend Period: 2.5 years • (8) Exponential Trend Factor [1.0 + (7)] ** 2.5. . . . . . . . . . . . . . . . . . . . . 1.13 • (9)Trended Ultimate Losses and ALAE = (5) * (6) * (8). . . . . . . . . . . 2,774 • (10) Fixed Expense Ratio (FER). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • (11)Fixed Expenses = (1) * (10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • B. EXPECTED (Target) Loss + Fixed Expense Ratio. . . . . . . . . . . . . . . . . . . . . • C. INDICATED RATE LEVEL CHANGE = (A / B) - 1.0. . . . . . . . . . . . . . .. .

  37. UNDERWRITING EXPENSES • Commissions and premium taxes vary directly with premiums • Other acquisition and general expenses are “fixed” • Not really fixed • Vary with inflation

  38. EXPENSE ANALYSIS Direct Expenses Other Than Allocated Loss Adjustment Product XYZ Countrywide Figures (I.E.E. - Insurance Expense Exhibit) (In $ Millions) EXPERIENCE PERIOD 1998 1999 2000 $ % $ % $ % Written Premium 107,400 100 121,600 100 142,400 100 Commissions 16,100 15.0 19,200 15.8 22,100 15.5 Other Acquisition 4,200 3.9 4,700 3.9 5,300 3.7 Administrative 5,800 5.4 6,200 5.1 8,200 5.8 Unallocated Loss AdjustmentExpense 6,200 5.8 7,500 6.2 8,200 5.8 Taxes, Licenses &Fees 3,500 3.3 4,100 3.4 4,900 3.4

  39. DEVELOPMENT of EXPECTED LOSS RATIO & FIXED EXPENSE RATIO Total VariableFixed Commissions 15.5%15.5% 0.0% Other Acquisition 3.81.91.9 Administrative 5.4 0.0 5.4 Unallocated Loss Expenses 6.0 0.0 6.0 Taxes, Licenses & Fees 3.43.4 0.0 Profit & Contingency 4.04.0 0.0 Other Costs * 0.50.5 0.0 TOTAL 38.6%25.3%13.3% TARGET Loss, ALAE & Fixed Expense Ratio = 100.0% - 25.3% = 74.7% * Policyholder Dividends, Involuntary Market Costs, Guaranty Fund Assessments, Etc. (if allowable)

  40. RATE INDICATION WORKSHEET Loss Ratio Methodology - Fixed Expense Approach • A. EXPERIENCE Loss + Fixed Expense Ratio = (9 + 11) / (4). . . . . . . . . . . . • (1) 2000 Earned Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,690 • (2) Current Rate Level Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.032 • (3) Premium Trend Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.056 • (4) Trended Premium @ Current Rate Level = (1)*(2)*(3).. . . . . . . . . .4,021 • (5) Accident Year 2000 Ultimate Losses. . . . . . . . . . . . . . . . . . . . . . . . . . 2,232 • (6) Allocated Loss Adjustment Expense (ALAE) Factor. . . . . . . . . . . . . . 1.10 • (7) Annual Loss Trend _5.0__% Trend Period: 2.5 years • (8) Exponential Trend Factor [1.0 + (7)] ** 2.5. . . . . . . . . . . . . . . . . . . . . 1.13 • (9)Trended Ultimate Losses and ALAE = (5) * (6) * (8). . . . . . . . . . . 2,774 • (10) Fixed Expense Ratio (FER). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13.3% • (11)Fixed Expenses = (1) * (10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491 81.2% B. EXPECTED (Target) Loss + Fixed Expense Ratio. . . . . . . . . . . . . . . . . . . . .74.7% C. INDICATED RATE LEVEL CHANGE = (A / B) - 1.0. . . . . . . . . . . . . . ..+8.7%

  41. OTHER CONSIDERATIONS • CREDIBILITY • DEDUCTIBLES • TYPES (Straight, Franchise, Percentage) • Must consider deductibles offered • Will the offerings change; will the mix of change • Deductible relativities based on Loss Elimination Ratios • LIMITS • Basic limits data used for auto indication; Increased limits reviewed separately • Basic limits review emphasizes frequency of loss, not severity

  42. BASIC RATEMAKING TECHNIQUES Suggested Readings Foundations in Casualty Actuarial Science, Ratemaking by Charles L. McClenahan, Chapter 2, pages 25-90. Statement of Principles Regarding Property and Casualty Insurance Ratemaking, CAS Committee on Ratemaking (1988). Insurance Operations, Webb, Harrison and Markham, CPCU Text, Chapters 10 and 11. Introduction to Ratemaking and Loss Reserving for Property and Casualty Insurance, by Robert L. Brown, Chapter 3 - Ratemaking Trend and Loss Development Factors, by Charles F. Cook, 1970 Proceedings of the Casualty Actuarial Society

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