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

538 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGmine hurricane deductible factors by scenario testing over severalmodel runs on the same experimental data sets, with onlythe deductible option changed in each scenario. Specifically, replacingthe base 2% deductible with each of the other deductibleoptions (in our study, 0.5%, 1% and 5%), the model is repeatedlyrun to determine the simulated loss elimination ratio.Catastrophe simulation science indicates that the shape, aswell as the scale, of hurricane loss distributions varies widelyby territory. In fact, areas with high average hurricane loss costsalso tend to have a greater frequency of severe storms that producemore near-total property losses. Ideal hurricane deductiblefactors should therefore vary by territory. In consideration ofmaintaining manageable rating logic, the study examines thescale (expected annual loss costs by territory) of the hurricaneloss distribution by territory from the experimental base dataset and divides the territory set into Low (less than $400 peryear), Medium ($400—$599), High ($600—$1,099), and Extreme($1,100 and over) hurricane intensity zones. The boundaries aredetermined by judgment, and intended to include a reasonablenumber of modeled locations in each zone–though most modeledpoints are in the Low zone, the higher-intensity zones mustbe segregated to produce reasonably accurate factors. The modeledlosses are aggregated under each scenario in each zone,the relativities to the modeled losses at the base deductible arecomputed, and deductible factors selected. Exhibit 14 shows theresults.When using the model to price flat dollar deductibles as amodification to the base rate for a percent deductible, the problemof exogenous values insured pops up again, in a differentdisguise. Any flat amount represents a constant percentage ofa single experimental base value insured, no matter what thechoice. For example, the modeled losses, and therefore the losselimination ratio, for a $500 deductible scenario will be identicalto those for a 0.5% deductible scenario when the base value is