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

524 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGaggregate F R derived on Exhibit 4 (expressed per unit of losses).The success of the technique does not require this choice–thescale factor could be set lower in some territories and higherin others to reflect second-order assumptions about the capacitycharges levied by reinsurers in different areas.The modeled number of exposures (essentially a land-areaweight given the construction of the experimental data sets),modeled (mean) loss cost, and modeled standard deviation oflosses are collected for locations falling in each proposed territory.Note that the overall modeled loss cost is the exposureweightedaverage by territory, but the aggregate standard deviationis not additive–it must be collected directly from themodel output. By design, the allocated fixed reinsurance costs,reflecting the scale factor, do average (exposure-weighted) tothe aggregate fixed costs derived in the overall rate level indication.The sum of the modeled loss cost and fixed reinsurance costfor each territory is the basis for the cost relativity to the statewideaverage. This relativity is the theoretical territory factor. In practice,allowance is made for a tempering of the indicated ratingfactor toward unity due to competitive or regulatory pressure.This is not “credibility weighting” because the modeled loss costsare fully credible in a convergent hurricane model. 21 The temperingis a non-actuarial exercise. If it is present, the resultingfactors must be rebalanced to unity.The techniques may be applied in an identical fashion toexperimental data sets for both homeowners and mobile homeforms. This study found that the statewide range of territory factorswas slightly wider for mobile homes.21 The Florida Commission on Hurricane Loss Projection Methodology, an agencycharged with certifying the validity of catastrophe models used in rate filings in thestate, uses a standard by which modeled mean loss costs must “converge” within a certaintolerance at the ZIP code level. The simulation size required for convergence can bevery large (50,000 years in the case of at least one model).