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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 509or territory is crucial for derivation of the proper rating factors.The choice to recover all non-loss reinsurance costs in the hurricanebase rate means that the classical formula for rating factorswill apply for non-hurricane perils. For the hurricane peril, anexample is shown of class (mitigation) factors calculated usingthe non-proportional assumption for these costs, and territoryfactors calculated using a modified proportional assumption forthese costs. Also note that the formula can be expressed using anexpected loss ratio and fixed reinsurance cost ratio to unmodifiedpremiums (for the peril in question), since the premium dollarscancel out in formula (10).Basic rating logic for the proposed structure is outlined inExhibit 17. The rates and factors shown are for purposes ofexample only and do not have any particular significance. Thederivation of base rates and various rating factors follows in latersections for each peril:² Fire² Hurricane² Other Wind (non-hurricane windstorm, including tornado andhail)² Liability/Medical² All other perils (AOP)Total “key” premium and total base premium are the sum ofthe key and base premiums, respectively, for each of the fivecomponents. Key premium (retaining the terminology used inthe classical plan) represents the actuarially sound rate for firstdollarcoverage on a risk of a base amount of insurance. Basepremium is key premium adjusted for:² The total value insured relative to the base amount, and² The chosen deductible.