AS462_Lec10 - ACTSC 462/862 P&C Insurance Ratemaking...

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1 ACTSC 462/862 P&C Insurance Ratemaking Lecture 10
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2 Basic Ratemaking Chapter 15: Commercial Lines Rating Mechanisms
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3 Basic Ratemaking – Chapter 15 > Chapter covers: • Manual rate modification mechanisms: experience rating and schedule rating •Rat ing techniques for large commercial risks: large deductible plans, loss rated composite rating, and retrospective rating plans > Commercial risks may be subject to one or many of these rating mechanisms
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4 Basic Ratemaking – Chapter 15 > Manual Rate Modification Techniques: • Manual rate modification techniques rely on past experience and/or risk characteristics not adequately reflected in the manual rate or the past experience • There are two basic types of manual rate modification techniques: – experience rating and schedule rating
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5 Basic Ratemaking – Chapter 15 >E x p e r i e n c e Rating: •U s e d when the past is predictive of the future •T h e experience rating adjustment for the future policy period manual premium is equal to a credibility weighting of the adjusted past experience (the “experience” component) and some expected results (the “expected” component) –i . e . cost for the current period is determined by weighting the actual losses and ALAE for prior period and expected losses and ALAE
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6 Basic Ratemaking – Chapter 15 >E x p e r i e n c e Rating: •T h e comparison of the experience and expected components can be performed in many different ways: Actual paid loss (and ALAE) compared to expected paid loss (and ALAE) for the experience period as of a particular date Actual reported loss (and ALAE) compared to expected reported loss (and ALAE) for the experience period as of a particular date –P r o j e c t e d ultimate loss (and ALAE) compared to expected ultimate loss (and ALAE) for the experience period r o j e c t e d ultimate loss (and ALAE) for the experience period that has been adjusted to current exposure and dollar levels compared to expected ultimate loss (and ALAE) based upon the current exposure and dollar levels
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7 Basic Ratemaking – Chapter 15 > Experience Component: 1. Must determine the length of the historical experience period to be used in the experience rating formula (typically 2 to 5 policy years Æ shorter is more responsive) 2. The historical experience may need to be adjusted for extraordinary losses (maximum single limit (MSL) = per occurrence cap) 3. Need to develop losses if projected ultimate losses are to be used 4. Further adjustments to the historical losses are needed if the basis of the experience rating formula is projected ultimate losses at current exposure and dollar levels
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8 Basic Ratemaking – Chapter 15 > Adjustment example:
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9 Basic Ratemaking – Chapter 15 > Expected Component: • Expected losses are usually estimated as: expected loss rate exposure measure •The expected loss rate is the expected loss cost reflected in the manual rates Æ it can reflect either the prior or current period •I f the loss rates are needed for a prior period, the
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This note was uploaded on 10/30/2011 for the course ACTSC 462 taught by Professor Wslennox during the Winter '11 term at Waterloo.

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AS462_Lec10 - ACTSC 462/862 P&C Insurance Ratemaking...

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