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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 501Underwriting and Adjusting Expense RatiosOnce the experience ratios are determined with formula (2),one must consider underwriting and adjusting expenses, reinsurancecosts, and profit. Exhibit 3 shows an analysis of expenseprovisions. Recent calendar year underwriting expense ratios foreach component:² Commissions and brokerage;² Other acquisition expenses;² General (overhead) expenses;² Premium taxes (which must be shown separately in somestates);² Other taxes, licenses and fees;are used to estimate future expected expense ratios. It is temptingto select the multi-year average, but trends in expense ratios oftenreflect structural changes in finance or operations and must begiven some credence in the selection of future ratios.An assumption must also be made about the proportion ofeach component that varies directly with the premium charged.Commissions and most taxes and fees are assessed as percentagesof net premium and thus treated as 100% variable. Generalexpenses are almost exclusively allocated amounts of fixed overheadamounts and a 100% fixed assumption is usually appropriate.Other acquisition expenses include some fixed administrativecosts, but also the cost of field inspections and policy-specificcosts that may vary with premium size. This study assumes 50%of expenses in this category are fixed. Underwriting expense ratiosare usually expressed to direct written premium, as they arealmost fully incurred prior to policy inception.Fixed underwriting expenses reported by line actually reflectaccounting department allocations of companywide expenses to