C.4. Special Classifications Flashcards
Two steps in territorial ratemaking
- Establishing territorial boundaries
2. Determining indicated rates for each territory (preferably using GLM due to correlations between variables)
Challenges in determining indicated rates for territories
Territory tends to be highly correlated with other rating variables
Territories are often set to such small areas that credibility is lacking
Clustering routines in territorial ratemaking
Quantile methods: clusters will have equal # observations or equal weights
Similarity methods: clusters based on closeness of estimated relativities
Spatial smoothing approaches, advantages
Distance-based: best suited for weather perils. Disadvantages: assumes distance has same impact for urban and rural risks and doesn’t consider physical boundaries
Adjacency-based: Best for socio-demographic perils (theft)
Assumptions in pricing ILFs
All UW expenses and profit are variable and do not vary by limit
Frequency and severity are independent
Frequency is the same for all limits
Why standard ratemaking is problematic for determining ILFs
Generally less data for higher limits
Analyses can produce results that are impractical to implement (lower price for higher limit)
Why loss data should be trended and developed for ILF pricing
Higher limits can experience higher severity trends, and development can take longer on larger claims
ILF(H)
LAS(H) / LAS(B)
= severity at H / severity at B
LER
LER (D) = losses and LAE below D / ground-up losses and LAE
The percent of losses eliminated with the new deductible
What an expense constant accounts for
For expense costs that do not vary by size of risk
Why small WC risks have worse loss experience than large risks
Less sophisticated safety programs
Usually no return-to-work programs
Not impacted of do not qualify for experience rating, so less incentive to reduce injuries
Two issues when properties are not fully insured
Insured not fully covered in the event of a total or near-total loss
If the insurer assumes all homes are fully insured when calculating rates, premium charged for underinsured policies will not be adequate to cover expected losses for those policies
How premium rate changes as ITV increases based on skew of severity distribution
For right-skewed, rate will decrease at decreasing rate as coverage increases
Coinsurance apportionment ratio, payment, and penalty formulas
ratio: a = min [F/cV , 1]
Payment: I = min [aL, F]
Penalty: e = min[L, F] - 1
c: percent required
F: face value of insurance
V: value of property
L: size of loss
