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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 5111. Fixed (non-loss) reinsurance costs can be allocated appropriatelyby peril to specific base rates and ratingfactors.2. The share of actuarially sound base premiums by perilmay be highly geography-dependent. Class and territoryrating factors should be calibrated to the expectedexperience differentials for individual perils and appliedby peril.3. Territory boundaries should reflect loss cost gradients,which are heterogeneous by peril–distance to coastdrives those for hurricane, other geographic featuresdrive those for non-hurricane windstorm, and politicalboundaries may drive those for other perils. Perilspecificdevelopment of territory boundaries allowsmore accurate rating factors by peril.4. The existing construction types used in rating are primarilydesigned for differentiating fire danger, and therelative wind damageability inherent in these classesoverlaps with an explicit windstorm mitigation classplan. Base premium separation allows targeting of classificationfeatures to the perils they affect.5. It is shown later that amount of insurance (“key factor”)curves and the loss distributions for deductiblefactors differ greatly by peril. Peril-specific rating allowsproper differentiation of base premiums by valueinsured and deductible amount.6. Percentage deductibles are (at this time) specific to thehurricane peril in Florida, due largely to statutory mandatesto offer flat deductibles. The current rating planmust adjust for flat dollar/percent deductible combinationsthrough a complex set of tables a problem removedin the unbundled rating plan.