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

544 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGdynamic effect on overall premium and policy volume (as pricesincent consumer actions) and distributions by policy form, territoryand class. Yet this is actually the effect of greater magnitudeto the profitability and growth of the insurer in the longrun. When all the insurers competing in a market have similarrate structures and the market is relatively stable, the effect ofan overall rate level change that does not displace many existingcustomers differently than the overall average may perhaps bemeasured with ignorance of dynamic competitive effects. Whenan insurer makes a market-leading change to a modern ratingarchitecture, the likely competitive effects must be examined inadvance and monitored closely as the architecture is rolled out.Returning to Cummins [7] will remind the reader of how criticallycertain market attributes can affect the possibility of adverseselection against the insurer.On the flip side, a modern rating plan is one of the few waysto gain a sustainable competitive advantage in the market withouta significant investment in operational scale and surplus capacity.Further, marketing and underwriting restrictions should becomprehensively reviewed and aligned with the rating plan onceit is implemented. Historical restrictions that reflected rate adequacyconsiderations in particular territories and classes may berethought as the marketing plan is revisited. In summary, a morerefined rating plan should facilitate some additional growth givenconstant surplus.The regulators (and possibly private sources) in many statescollect proposed premiums for standard rating examples (a.k.a.“risk profiles”), which are most often publicly available. Theserate comparisons may also include the residual market rate fromthe insurer of last resort if there is one. The actuary can compilesuch comparisons as a leading indicator of changes in competitiveposition, at least for “typical” risks. Regulators may beinterested in the proposed position of the insurer against public(residual market) as well as private competitors, dependingon the level of political pressure against raising residual market