W&M Ch 14 Flashcards
Non-Pricing Solutions
- Expense Reductions 2. Reducing Average Expected Loss -Change in mix of business 3. Reduce coverage provided by policy 4. Institute better loss control procedures
Potential Action to change mix of business
-Tighten underwriting criteria -Non-renew policies that are significantly underpriced
What are the necessary steps in calculating new rates for an existing product?
- Select an overall average premium target for the future policy 2. Finalize the structure of the rating algorithm 3. Select the final rate differentials for each of the rating variables 4. Calculate the proposed fixed expense fees, if applicable 5. Derive the base rate necessary to achieve the overall average premium target
Calculation of Fixed Expense Fees and Other Additive Premium
Derivation of Base Rate
- Extension of Exposures Method 2. Approximated Average Rate Differential Method 3. Approximated Change in Average Rate Differential Method
Describe Extension of Exposures Method
- Rerate individual policies or unique combinations of rating variables using current rates
- Using proposed rates differentials and expense fee, calculate average premium
Describe Approximated Average Rate Differential Method
Describe Approximated Change in Average Rate Differential Method
- Can use change in average rate differential and focus solely on rating variables that are changing
- Weight with current variable premium
- Calculate the proposed base rate using the indicated overall change with the following
Considerations when using premium transition rule
-Need to determine max/min premium change amounts -Rules apply only to premium changes directly resulting from rate change –change in exposures or other risk characteristics should not be included -Length of time to implement –depends on rate change and transition rule –want to avoid long periods to avoid multiple overlapping transition periods created by multiple rate changes -Effect of average premium level should also be considered and base rate adjusted accordingly –decide whether want projected average premium over transition period or by the end
Expected Distribution used to calculate rate effect
-Typically use latest inforce exposure distribution to project future distribution –should adjust for any known changes to happen in prospective period -Assume rate change will not change the existing portfolio –validity of assumption depends on product, market conditions, and extent of change -Price optimization techniques address issue of change in volume and distribution –considers how rate change is expected to affect demand
Calculating New Rates based on Bureau or Competitor rates
-Company data for similar products -Similar products of competitors -Information from rating bureaus
Communicating and monitoring proposed rates that apply to new product
-Regulators –likely want source of derivation of rates –some justification for judgmental adjustments -Company internal management –want to know expected profitability –competitive position
Communicating and monitoring proposed rates that apply to existing product, more extensive communication
-Regulators –may require significant detail on methodology used –detailed policyholder premium impacts -Company internal management –want to understand impact on: 1. Competitive position 2. Expected volume 3. Expected profitability