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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 5433. Assess the overall rate level impact of the selectedrate structure and reconcile it with the indicated overallchange.Step 3 is extremely important to both internal and externalstakeholders in the insurance economy as well as to the actuarycharged with maintaining profitability. It may be accomplished atseveral levels of granularity. When only a few base rates and ratingfactors are changing and there are no significant changes tothe rating logic, aggregate estimates of the overall impact may besufficient. The extreme case would be a single change to a baserate that applies to all policyholders, in which case the actuarycould state with certainty the overall impact without analyzingthe effect at the policy level. When the rating logic and territorydefinitions are completely redesigned and each base rate,class and territory rate table is developed from first principles,the other extreme applies. The overall rate level impact must bemeasured by re-rating every existing policy on the proposed ratestructure.The actuary must be prepared to build tools that compare“before and after” premiums for each existing policyholder andthat can be run iteratively in a timely fashion. Again, technologyis the enabler allowing the extraction of high-quality data andexecution of rating logic quickly to measure rate impacts in thisfashion. As the impacts are compared against the indications, themost efficient technique for iterative adjustment is a flat factorapplied to the base rates by policy form. 32 This study does notvary the flat factor by peril, which has the effect of preservingthe overall distribution of base premium.Competitive and Residual Market AnalysisEven a policy-level measurement of static overall rate levelimpact is still insufficient to indicate the likely second-order or32 As a regulatory matter, some states require rate indications developed by policy form–in this milieu, the flat factor applied to the indicated base rates to achieve the overallindication should also vary by form.