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

ARCHITECTURE FOR RESIDENTIAL PROPERTY INSURANCE RATEMAKING 549The basic rating logic may be of primary concern to the actuary,but the policy services, programming, statistical reporting,and manual writing personnel will spend most of their time dealingwith its effect on the adjustments to base premium and themiscellaneous rules for and endorsements available in the residentialproperty program. The actuary should be prepared toinvest significant time and effort in assisting these vital stakeholdersin modifying the other processes downstream that areaffected by the changes in basic rating logic.12. CONCLUSIONWhether due to necessity or strategy, insurers can improve thestability and adequacy of overall rate level as well as the actuarialequity of individual policy rates by investing in a modern ratingarchitecture for residential property insurance. Elements of themodern rating plan may include:² Proper use of simulated losses for catastrophic perils in overallrate level, territory and class rating;² A fair premium structure that is aligned with the need for appropriateconsideration of expected losses, fixed and variableunderwriting expenses, and costs of capital by peril;² Base premiums divisible by peril and subject to distinct classificationand territory rating plans;² Refinement of corresponding territory definitions;² Introduction of new class plans targeted to individual perilsformerly not class rated;² Coverage modification (amount of insurance, deductible andlimit) factors that reflect differing loss distributions by periland appropriate assumptions about the loss cost distributionfor catastrophic events;