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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 537tuarial theory states that the LER for the same deductible optionand the same underlying (unlimited) loss distribution willbe smaller as the average TVI (policy limit) increases. Further,the relationship between the LERs for two (small amount) deductibleoptions should be dampened as both options representan ever-smaller portion of increasing TVI. This implies a twowayconsistency test for deductible factors:1. The selected factor for a given TVI range should (obviously)decrease as the deductible increases, and2. The selected factors for a given deductible should convergetoward unity as the TVI range increases. 30When this process is compared for multiple perils, one expectsthe loss distribution for perils which tend to result in more totallosses (such as fire) to imply smaller LERs at all deductibles, andtherefore deductible factors closer to unity, than those implied bya peril producing more partial losses (such as AOP). Therefore,across multiple perils a third consistency test applies:3. The selected factor for a given TVI range and deductibleoption should be closer to unity for the more “severe”peril (the one with the more right-skewed distribution ofloss amounts).Exhibit 13 shows representative LERs and selected deductiblefactors that reflect all three tests.Deductible Factors–Modeled PerilsPercent deductibles applicable only to the hurricane peril arethe rule in Florida. They were originally introduced as an innovativeway to reduce loss exposure without nonrenewals inthe market turbulence following Hurricane Andrew in 1992. Inlieu of experience data, this study uses the cat model to deter-30 Whether they start above or below unity is determined by the base deductible.