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

506 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGcatastrophe simulation output, rather than a direct premium measure.The direct premium, subject premium, and allocated cededpremium for the line under review are carried to Exhibit 4. 125. STRUCTURE OF FAIR PREMIUMDerivation of Fair Premium ComponentsGiven the components of overall rate level, our next task isto design a rate structure that collects a fair premium through acombination of charges. When partial base rates vary by peril,yet some fixed expenses (the reinsurance provision) are not allocatedequally to peril, the classic ratemaking formulas need somecareful modification.The overall rate level change is developed using the loss ratioratemaking method. In contrast, the new base rates and ratingfactors are developed from loss costs. This is necessary becauseeach base rate and relativity is new and peril-specific, and cannotbe expressed as a change to a previous factor, yet conversionto premium rates and rating factors is necessary for pricing.Note that “loss ratio” ratemaking (which produces the indicatedchanges to existing base rates needed to reconcile the indicatedoverall rate level change with the expected rate level impact ofthe rate and rating factor changes) is not incompatible with divisiblepremiums once the modern plan is in place and divisiblepremium statistics are used to do periodic rate reviews. It is, however,incompatible with the transition from indivisible to divisiblepremium.In the proposed rating plan, premiums are levied in three parts:² Base rates by peril, which cover raw loss costs (and fixedreinsurance costs where necessary), “loaded” for variable underwritingexpenses and profit;12 In Florida, the public reinsurer develops participating primary insurers’ ceded premiumsdirectly from exposure rather than in aggregate. Therefore, there is no need toallocate the public cat reinsurance premium.