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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 4954. Every property is “geo-coded” with exact longitude andlatitude, allowing us to place “pins” on maps and analyzestatistics from any geographic aggregation we wish.Optimal territory boundaries with respect to gradientsin loss and capital costs can be quickly identified withGIS software and scenario testing. This contrasts withthe limitations of ZIP code experienced by some earlierauthors.The following case study leverages each of these key attributesof the simulation tools. The advancement of modeling scienceand related technology is the enabler of much of the work tofollow.4. OVERALL RATE LEVEL CHANGESFollowing is a complete study of ratemaking for residentialproperty lines, not simply a description of modern enhancements.Accordingly, first comes a discussion of the development of overallrate level changes. Components that will be targeted by ourdetailed rating architecture are highlighted.A comprehensive description of classical overall rate levelindications for homeowners insurance in a pre-catastrophe modelingenvironment is contained in Homan [10], and a concise,thorough review of basic techniques in McClenahan [14]. Thefollowing data is used to develop the indicated change in ratelevels:² Five accident years of direct paid and case-incurred losses and“defense and cost containment” (D&CC) expenses, organizedby calendar year (development age), with cat losses identified;² Five calendar years of direct written and earned premiums, andthe historical rate tables necessary to bring them to present ratelevels using the extension-of-exposures technique;² Five calendar years of direct earned exposures (house-yearsand total values insured or “TVI”);