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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 545rates to maintain minimal competition with the private market. 33Exhibit 16 shows an example of a rate comparison that might beuseful. The actuary should encourage all stakeholders to keep inmind several distortions inherent in rate comparisons:² Comparing an individual insurer’s proposed rates to the competition’scurrent rates may produce a false sense of competitiveposition when rate levels are rapidly rising or fallingindustry-wide, due to the natural time lag between successivefilings. Emerging causes of loss, capacity problems affectingreinsurance prices, and other phenomena may not yet be reflectedin the current (more accurately, the last filed) rates ofcompetitors or the residual market.² Comparisons are often based on the “average” rate for a particularcounty or wider geographic region. The average maybe weighted by an exposure distribution that does reflect thatof the insurer, or it may not be weighted at all–a simplearithmetic average using one rating example for each territorywithin the area. The insurer implementing more refinedterritory definitions than its competitors produces an averagefor coastal areas that is most likely skewed upward in this case,because of its removal of inland subsidies to coastal businessin a more refined hurricane territory structure. The example fora small coastal territory, perhaps even one in which the insurerhas no current business, gets equal weight with the inland examplefrom a much wider land area and more populated arealetting the high coastal rate drive the average.Rate Dislocations and Transition PlanningAs critical as it is to understand the proposed rating plan’scompetitive impact on the ability to write new business in each33 In Florida, some residual market rates are set based on the highest premium reportedby the top twenty private insurers (as ranked by premium market share) for a givenrating example in each county, which focuses regulatory attention more directly on thedifferential between an insurer’s proposed rates and those for the residual market in thesame geographic area.