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

536 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGrating factors, such as value insured, territory, and class. In orderto maintain manageable rating logic, flat dollar deductible factorsare allowed to vary by peril and TVI range, and by territoryonly for modeled perils.The deductible factors for non-modeled perils are developeddirectly from five years of individual claim data. Flat dollar deductibles($500, $1,000, and $2,500) are the only options fornon-modeled perils, in contrast with the percent (of coverage ATVI) deductibles offered for the hurricane peril and discussedbelow. 27 Each existing claim is stated on a “ground-up” basis byadding back the deductible amount associated with the claim. 28The net of deductible claim amount is determined for each claimunder each flat deductible option. The sum of all claims valuedat each deductible option is compared to the ground-up losses todetermine the empirical LER for each deductible amount. Thenthe deductible rating factor for each non-base deductible is calculatedasd i =1 ¡ LER d(15)1 ¡ LER Baseor the ratio of the losses retained (not eliminated) at the targetdeductible to those retained at the base deductible (of $500 inthis study).These factors depend heavily on the underlying exposure(TVI) distribution of the empirical data, since the amounts oftotal losses vary by claim but the flat amount does not. 29 Ac-27 There is no theoretical reason percent deductibles by peril cannot be priced from experiencedata. In fact, one could argue that percent deductibles are actuarially superiorfor all perils because they “inflate” with the value insured and therefore with the correspondingloss severity distribution, a big help in preserving the loss elimination ratiosunderlying the rating factors. The resulting factors become obsolete over time much moreslowly. Though state statutes tend to restrict deductible options depending upon TVI, atleast one Florida insurer has recently introduced an all-perils percent deductible.28 This does not solve the “missing claims” problem of losses not exceeding the actualdeductible which “would have been filed” if the deductible were smaller. This distortionis ignored here.29 The data was divided into TVI ranges which produced a credible and approximatelyequal amount of earned house-years in each range.