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

516 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGFor the fire peril, two sets of geographic factors may apply–a construction/PPC factor and a territory rating factor. A solidargument can be made for the elimination of territory factorsin fire once construction/PPC factors are redefined to apply tothe fire-only partial base rate. On the other hand, regional ordemographic differences in loss costs may persist even after adjustingfor the level of fire protection by area. This case studyfound enough variation in fire hazards among territories to justifycontinued use of a territory rating factor in addition to theconstruction/PPC factor.All peril-specific actuarial considerations must be weighed inpromulgating revised territory definitions. In addition, practicalconsiderations favor having a single set of boundaries, and thoseboundaries being determined by landmarks (such as major roadsand bodies of water) that are recognizable to salespeople andconsumers. In summary, territory boundaries are based on theintersection of all of the following geographic data sets:1. Actuarially defined contours reflecting loss cost gradientsby peril and convenient landmarks that are locatedclose to the modeled contours;2. Classical (existing) company territory definitions, whichsegregate barrier islands and some coastal areas;3. ISO territory definitions (which generally follow countylines, with some municipalities and a few barrier islandsseparated);4. Existing county lines.Consideration of existing company territory boundaries is extremelyimportant for the processes of transitioning individualpolicy/location records to the new lines. A one-to-many relationshipbetween each existing territory and the new territoriesallows a simple “lookup” rather than a geo-coding exercise inpolicy management systems. Likewise, consideration of existing