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

526 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGunity would be that of:² Adjusted relative loss ratios (losses divided by premiumsstated at present level and adjusted to “base” or statewide averageterritory level) by territory, and² A weighting vector of earned premiums (on present base territorylevel) by territory.In the loss cost approach used in our study, the appropriateweight becomes whatever exposure base is used to calculate relativeloss costs. Earned total value insured is the base (one unitof earned TVI is equal to one house insured for $1,000 for oneyear), so it is used both to calculate relative loss costs and tobalance the statewide average territory factors to unity.Classical (limited-fluctuation) credibility is applied to the relativeloss costs, again using earned TVI as the base, to obtainfinal indicated factors. Many other credibility techniques couldbe applied, but a survey of them is beyond the scope of this paper.The full credibility standard V f is chosen by judgment, andthe credibility for a single territory issViZ i = : (13)V fAgain, it is possible that selected territory factors may differfrom indications for non-actuarial reasons. The selected territoryfactors are rebalanced to a statewide average of unity using theweighting discussed above.Depending on claim volume, territory factors for the liabilityperil may be set using regional aggregations of territories. Alternatively,regional loss cost relativities might serve as the complementof credibility for territory-level relativities. In fact, theseregions do not have to be geographically contiguous if liabilitytrends tend to follow city and suburban demographics. In anycase, the same techniques are applicable except that loss datashould also be converted to basic limits to avoid demographicbias.