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

528 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGThe study noted several additional attributes that reduce hurricanelosses enough to be treated as “secondary rating factors”:² Opening protection coverage (windows only or all openingsincluding doors and garage doors)² Gable end bracing (present or not)² Wall construction (the traditional fire class variable, frame ormasonry)² Wall-to-foundation restraints (present or not)An actuarially interesting result of the study is that the reductionsin expected loss cost for various combinations of devicesturn out to be highly interactive, meaning that the classfactors cannot be set for individual devices and multiplied oradded across all devices present to determine the appropriatecomprehensive class factor. Instead, a multi-dimensional table ofmodeled primary rating factors for each combination is needed,such as the one shown in Exhibit 11. 23The indicated reductions in loss costs for the various combinationsalso depend upon the terrain category (flat, swampy,hilly) associated with the property location. ARA divided thestate into two basic terrain categories that they denoted “B” and“C.” A reasonable choice is to map the terrain category definitionsshown in the study to the proposed territory structure,designating each entire territory as one category to facilitate thedetermination of class factors from the tables without additionalgeo-coding.Given the raw loss cost relativities, the final class factors muststill embody a key actuarial assumption. When the mean loss costis reduced (relative to the unmitigated base structure) for a houseby application of mitigation devices, should its allocated portion23 Exhibit 11 shows the actual factors promulgated in the ARA study, relative to a basestructure which is largely unmitigated and carries a 2% hurricane deductible.