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

540 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGnot differentiated by zone. This simplifies the process by removingone dimension from the matrix of rating factors. Catastrophesimulation science indicates that other wind aggregate loss costsare driven by expected event frequency and that the shape of theseverity distribution of individual severe thunderstorm events isnot as critically different by territory. Further, other wind is amuch smaller portion of overall base premium in Florida, leadingto the decision to waive this adjustment.Limit Factors–Liability/MedicalThis paper breaks no ground with respect to the actuarial techniquesfor calculating limit factors for the liability peril (coverageE), but there are still advantages to divisible base premium.Limit factors are often based on benchmarks obtained from thevoluminous databases and advanced loss distribution analysisprovided by advisory organizations such as ISO. With distinct liabilitybase premium, there is an opportunity to move away fromthe cumbersome additive charges commonly used in residentialproperty insurance and develop multiplicative limit factors for liabilitybase rates with appropriate reference to industrywide data.The modern rating logic includes a liability base rate modifiedby a multiplicative factor.Medical payments coverage (coverage F) is such a small partof the overall base premium that one may simply add the baserate to that for liability (after modification by the limit factor) andallow for the existing additive medical limit factors. Applicationof multiplicative factors to medical might even result in premiumchanges of less than one dollar, which is not practically desirablein most policy administration systems.10. ADJUSTMENTS TO BASE PREMIUMMany adjustments (charges and credits) are made to the basepremium to determine a final homeowners policy premium, evenwithout the presence of specific endorsements. The modern ratingarchitecture allows several improvements to these adjust-