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

548 ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKINGstatistics. At the next renewal, update the transition factorby multiplying by the maximum premium increase,limiting it to unity:T 1 =Min(T 0 £ M,1:00): (18)6. Repeat the adjustment of base premium and storage ofT i for as many periods as necessary until it is 1.00.It is straightforward to modify this algorithm to accommodate atransition plan that limits both premium increases and decreasesfor individual policyholders.Steps 1 and 2 reflect the fact that there are many exposuressuch as endorsements and “inflation guard” (which provides automaticannual increases in TVI to keep pace with replacementcost inflation) of which the treatment should be carefully specifiedin designing any transition logic. Just as important is a costbenefitanalysis of the revenue loss expected from the transitionplan, at least in the first year. Figure 5 should be reproduced toshow the rate impacts net of the transition plan. A granular analysisof premiums on proposed rates, by policy, with and withoutthe transition plan should be conducted to aggregate the revenueimpact companywide and by territory. This is the only reliableway to assess the plan’s impact.Miscellaneous Rates, Endorsements, and Operational ImpactsMost miscellaneous coverages are rated using key premiumas the base. Recall that this is the fair premium for the classand territory, but reflecting a given base coverage amount anddeductible. Simply changing “key premium” to “total key premium”(the sum of the key premiums by peril) will allow migrationof much of the rating logic for endorsements in a soundmanner. However, rates per $1,000 of coverage and flat dollarcharges should be thoroughly reviewed to assess their adequacyas the overall rate level and its distribution by peril shift underthe modern rating plan.