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

496 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING² Three calendar years of underwriting expenses, including “adjusting& other” expenses (A&OE) associated with claim administration,allocated to category and line of business by theaccounting function;² Modeled expected cat losses by line of business, produced bya simulation tool from exposures in-force as of a given date;² The latest calendar year’s ceded catastrophe reinsurance premiums;² Various Annual Statement data required to generate a regulatedprofit provision.Exhibit 1 shows the development of the indicated overall ratelevel change. The formula 6 is:¢ = x + f + f R¡ 1 (1)1 ¡ vwhere:x = the weighted average experience ratio;f = the fixed (not varying directly with premium) underwritingexpense ratio to direct premium; 7f R = the fixed non-loss reinsurance costs (premium in excessof modeled expected losses), expressed as a ratio to direct premium;v = the variable expense rate per dollar of direct premium,which includes the profit provision calculated in accordance withregulations 8 and treated as a percent of premium.6 The general convention here is to let capital letters represent quantities in dollars (ordollars per policy) and lowercase letters represent factors or ratios to premium. Greekletters represent relativities or constants. Carets (ˆ) represent modeled amounts.7 Some actuaries include a trend adjustment in the expected future fixed expense ratio toreflect inflation of underwriting expense elements.8 Florida statutes prescribe a profit load calculation very similar to the Calendar YearInvestment Income Offset Method described by Robbin [9], with the assumed “fair” profitat 5% of premium. An economically “fair” profit provision would compensate the insurerfor a variety of business risks, well documented in actuarial literature. The statutory loadconsiders only time value of money on reserves held; we load the catastrophe cost of