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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 525Though loss and fixed reinsurance costs must both be consideredin all rating factors for the hurricane peril, formula (10)does not apply directly when this technique is used because:² The rates are balanced to the statewide average of unity, sothere is no base territory relative to which credits and debitsare expressed;² The fixed reinsurance costs are allocated directly in the calculationof the territory factors using the standard deviation ofmodeled losses.An adjustment to loss cost relativities may be necessary whenmitigation class factors are developed later.The territory factors for the other wind peril are developedusing identical experimental data sets, with the exception of loweringthe base deductible to $500. The same basic technique isapplied to the model output, with the deletion of the allocationof fixed reinsurance costs–the modeled mean loss cost relativitiesare the sole basis for the (possibly tempered and rebalanced)territory factors. The advent of simulation models for other windoffers the opportunity to exorcise the last vestiges of the classicalISO “excess wind procedure” and its brethren from ratemakingfor infrequent catastrophic events. 22Territory Factors–Non-Modeled PerilsStandard one-way actuarial techniques are applied to the problemof setting territory rating factors for AOP, liability, and fire(if desired) from historical experience. Exhibit 10 shows an analysisof AOP territory factors for completeness.In a loss ratio ratemaking approach, the actuarially correctinner product used to balance the average statewide factor to22 See Burger et al. [3] for an excellent contrasting description of the use of cat modelsfor hurricane and an excess wind procedure for other wind.