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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 497The derivation of each component of the overall rate levelchange will be discussed in turn, illustrated for the hypotheticalA-Florida Insurance Company. 9Average Experience RatioThe weighted average experience ratio is the inner product ofthe vector of experience ratios for each calendar/accident yearand a vector of selected weights. In Exhibit 1, we reflect typicaljudgments about the relationship of credibility to age of experienceperiod in our weight selections.The annual experience ratios themselves are developed as:where:x i = L £ l £ t L £ (1 + u)+Ĉ £ (1 + u C ) £ t CP £ ± £ t P(2)L = losses plus D&CC, excluding cat losses for modeled perils;l = loss development factor to ultimate;t L = selected loss cost (pure premium) trend factor;u = loading for A&OE as a proportion to losses;Ĉ = modeled expected annual cat losses;u C = the expected ratio of loss adjustment expenses (LAE,which includes D&CC and A&OE) to losses for catastrophicclaims;t C = exposure de-trend factor for modeled cat losses;capital elsewhere in the fair premium. Other valid risks potentially compensated by theprofit load are not treated in this paper.9 As the reader follows through several A-Florida exhibits, note that numbers generally“tie” within and across exhibits as much as possible, for tutorial purposes. However,the numbers used are not necessarily representative of actual data or benchmarks forindividual companies nor the industry as a whole.