PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

490 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGIn addition, residential property insurance was historicallymarketed as “complete” coverage for the hazards inherent in thelifestyle of the typical homeowner. Today’s consumers are increasinglydemographically diverse and willing to choose productsto fit their needs. Policy forms have evolved in response tothese trends, and it is imperative that the pricing of personal linesproducts also evolve with the spectrum of exposures insured.Many actuarial concepts discussed in this paper are venerable.Its contribution is to synthesize them in new ways in responseto a specific challenge–the transition from a classicalto a modern component rating architecture. Once this transitionis accomplished, maintenance of some aspects of the rating planusing classical actuarial methods (such as the “loss ratio” methodof determining rating factors) may still be optimal. The goal isto get the actuary across a sort of river Styx of property insuranceratemaking while ensuring that each part of the transitionwithstands review of, and is consistent with, canonical principles.Indeed, it is critical to undertake such a modernization inorder to remain true to many of the Actuarial Standards of Practice,particularly those of more recent vintage. 2 When standingon the other side, one hopefully can look back and recognizesome of the architecture as embodying potentially long-lastinginnovations in actuarial techniques.2. MOTIVATIONS: PUBLIC POLICY AND PRODUCT CHANGESNotwithstanding theoretical motivations, necessity is themother of invention. This paper may also be read as a case studyof the actuarial response to a pricing challenge manifested inpublic policy. The State of Florida passed into law a statewideUnified Florida Building Code (FBC) that supersedes all local2 A thoughtful review of ASOPs 12, 23, 29, 30, and particularly 38 and 39 is helpfulbefore and after reading this paper. Such a review should go a long way to convince thepracticing actuary that the motivations are consistent with upholding these Standards ofPractice.