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

520 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING² A garage with unreinforced door and no other opening protection(i.e. storm shutters).In other words, the base house is of base rating values and“unmitigated” with respect to hurricane damage, roughly as definedin the ARA study. 19It is advantageous to use experimental data sets for rating factordevelopment for modeled perils for several reasons. Actualexposure data generally reflects vastly different property profilesby region. These maldistributions extend to nearly every ratingvariable–average total value insured, average windstorm mitigationand fire protection level, average deductible amount, andothers. Hurricane or other wind modeled relative loss costs generatedfrom these lopsided exposure profiles would be so biasedas to be nearly useless.A related problem is that of “missing” exposure. In the extremecase, the lack of exposure in a new, more refined coastalterritory could result in an indication of a zero rating factor asa zero loss cost for the region is produced by the model. Alternatively,much of the existing exposure in coastal territoriescould be written on an “ex-wind” basis, whereby the hurricaneperil is excluded from the policy. If the exclusions are noted inthe data supplied to the model, the same problem will result. Inshort, when the territory boundaries are redefined, it is essentialto consider the full spectrum of possible exposures in geographicalrating factors. This is possible only with a contrived dataset.7. BASE RATES AND EXPENSE FEESRecalling formulae (7) and (8), base rates and expense feesare built from loss costs, fixed (non-loss) reinsurance costs, and19 In a parallel study for mobile-homeowners, an analogous experimental data set wasbuilt for a mobile home with MH-3 policy form, $20,000 coverage A and associatedstandard relationships for coverages B/C/D, and a “mobile home” construction type withno mitigation devices.