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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 493consistent and the contribution of catastrophic events to the aggregateloss costs is moderate. In Florida, the mitigation classplan is a catalyst for the development of base rates and ratingfactors by peril, as well as the redefinition of territories usingGIS mapping software and the extension of catastrophe modelingtechnology into windstorm class and territory ratemaking.However, the concepts are applicable to homeowners pricing inother geographic areas, and more generally to other property insurancepricing exercises.Public policy also influences emerging non-catastrophiccauses of loss. Statutory coverage mandates and resistance tocoverage restrictions in states with “prior approval” policy formregulation have contributed to the skyrocketing portion of policyloss costs associated with sinkhole claims in Florida and toxicmold claims in Texas and elsewhere. Florida statutes requiresinkhole coverage and severely restrict claim settlement options,resulting in frequent total or near-total losses after moderate settlingand cracking occurs in the residential structure. While moldis only a cause of loss as a result of another covered peril, theloss adjustment expenses and risk of large judgments have beenwell documented.This paper is not about specific emerging perils; the point isthat having the ability to segregate base premiums allows a “quarantine”of the loss costs associated with these perils at an earlierstatistical stage. Pricing must keep up with the ever-expandingcoverage in the property insurance product.3. MOTIVATIONS: TECHNOLOGY AND CATASTROPHEMODELINGIt is now settled actuarial science that actual losses fromcat events over short experience periods should be replaced inratemaking data by long-run expected cat losses derived from asimulation tool and the insurer’s expected exposures. See Clark[6] for an excellent fundamental justification for building cat