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

510 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGThe choice of base amounts and deductibles is discussed later.Each component is rated for territory and most for class, 13 andnon-liability components are rated for value insured and deductibleas well. The general total base premium formula reflectingN different perils is:Ã N!XP = B i £ ½ i £ ¿ i £ k i £ d i + E (11)i=1whereB = base rate;½ = class factor;¿ = territory factor;k = key factor (for non-liability perils);d = deductible factor (for non-liability perils);E = expense fee.Once total base premium is determined, the application of variouscharges and credits (primarily for coverage modifications)results in “adjusted base premium” that is comparable to thatin the classical rating plan. However, the existence of componentpartial base premiums allows credits and charges to applyto only the components of base premium judged actuarially relevant,with appropriate modifications to the percentage chargesand credits. Adjustments to base premium will be discussed furtherbelow.Implications of Fair Premium StructureLet us review some actuarial advantages and note some practicalbenefits of peril-specific base premiums, all of which contributeto a more sustainably competitive pricing of individualrisks in a 21st-century property insurance environment.13 This is a general term, encompassing the construction/protection factor (Fire), increasedlimits factor (Liability), and mitigation factor (Hurricane).