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

534 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING² .05 (meaning all losses are total and will “burn through” theadditional policy limit of 5% of the basic limit in a linearfashion). 26This is a non-trivial exercise requiring some trial and error.Exhibit 12 shows a reasonable curve given the credibility of someactual data and the theoretical limitations. Also, the factor for“each additional $5,000” beyond $250,000 primarily reflects themarginal factor in the last target interval.The effects of fire protection, construction, and average TVIoverlap severely in the rating plan. Higher-valued homes tend tobe of masonry construction and located in well-protected suburbanareas. Accordingly, the fire peril exposure amounts maybe adjusted to ameliorate this distortion to the raw incrementaland cumulative loss costs. Specifically, divide out the proposedconstruction/PPC rating factor from each exposure record in thestatistical data to get a loss cost stated “on base class.”Key Factors–Modeled PerilsIn catastrophe simulation models, the result for each simulatedevent at each location is typically the “mean damage ratio,”a value representing the damage as a proportion of the value ofthe structure(s) insured. The value of the structure is given as aparameter by the user of the model and the mean damage ratiois applied to it to generate the modeled losses. Put another way,in the models there is an assumption of independence betweenthe mean damage ratio for the structure and its insured value,all other attribute held constant. Most insurers make blanket (asopposed to policy-level) assumptions about insurance-to-valuewhen populating an exposure data set for simulation, which proportionallyaffect the modeled cat loss costs for pricing purposes.Assuming the values insured reported to the model are reflectiveof sufficient insurance to value, this attribute of cat models26 Recall that the base structure is defined as one of $100,000 TVI.