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

500 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING2. Time periods (example: 72 hours during which lossesare eligible for “cat” treatment)3. Geographic areas affected (example: areas subject togovernment warnings)4. Lines of business (example: exclusion of liability lossesfrom “cat” eligibility)It is wise to consider the associated definitions in company reinsurancetreaties as an example when developing parameters forcat loss reporting.The expected ratio of LAE to losses for catastrophes will dependheavily on how the insurer’s claims department handlesthese events. Use of mobile claims centers and contracting ofoutside adjusters may affect the assumed ratio. Historical dataon specific past events can be used as a guide in some cases;sometimes the ratio is very low (because the losses in the denominatorare high, not because adjusting catastrophic claims ischeap) when the insurer’s own claims personnel are the bulk ofthe adjusting corps. Hence, a provision for catastrophic LAE isomitted from the example for simplicity.The collected premium can be placed on-level by either theparallelogram method or the extension-of-exposures method discussedin Homan [10], though the latter is of great help whenit comes to estimation of rating factors. If the parallelogrammethod is used, the factor for each experience period will bederived explicitly from knowledge of overall rate changes andeffective dates thereof, as detailed in McClenahan [14]; if theextension method is used, the raw premium data must be linkedto all necessary categorical variables (class, territory, etc.) usedin ratemaking and complete sets of historical rate tables or “ratebooks”must be available to compute the premium for each policyas if it were written on the current ratebook. Then the factor informula (2) is implicitly the ratio of on-level to collected directearned premium. Neither method will be discussed in detail here.