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

522 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGcost ratemaking method along with historical property exposuredata, several distributional adjustments may be necessary. For thefire peril, the average underlying key factor (a function of TVI)and average underlying construction/PPC factor are likely highlydivergent by policy form. The exposure base, the denominatorof the loss cost, is multiplied by the average underlying factor inthe proposed rate structure (for each maldistributed rating factor)to restate it at a “base class” level for determining the base rate.Similar adjustments apply for average underlying limits in thebase rate for liability and average underlying TVI in the AOPbase rate. The adjusted loss cost must still be loaded for variableexpenses and profit, of course.The need for distributional adjustments to the loss cost basedon proposed rating factors means that these rating factors must bedetermined before the final base rates are. This is necessary foran efficient and equitable rate structure when rates are developedfrom the ground up. Later, it is shown that we achieve adequaterevenue under the modern rating plan by “solving for” the baserate that matches indicated overall rate level to estimated rateimpact.Expense fees by policy form are developed on Exhibit 8. Theratio of the latest year’s earned premiums (including such fees)to earned house-years represents an average premium per policy.The fixed expense ratio is applied to this value, and loaded toobtain the indicated fee. In practice, round numbers are oftenselected for expense fees and they are often set equal for similarpolicy forms.8. TERRITORY AND CLASS RATING FACTORSIn the basic rating logic, territory factors apply to every peril.In addition, class factors apply to fire (construction/protection)and hurricane (mitigation), and increased limits factors adjustthe liability premium. Base premiums for each non-liability perilreflect coverage adjustments for amount of insurance and amountof (or percentage) deductible.