Transcript Download Handout 1

PRICE MONITOR
Practical Considerations
Casualty Actuarial Society
2005 Ratemaking Seminar
John Ferraro FCAS, MAAA
Philadelphia Insurance Companies
Price Monitor
• Price Monitor Formulas
• Price Monitor Data Collection
• Price Monitor Reporting
Price Monitor Formulas
• Renewal Report
• Standard Report
• Benchmark Report
Price Monitor Formulas
• Renewal Report
– Calculate rate changes on expiring coverage
– Adjusts renewal premium to expiring
coverage level
• Adjustment to expiring limit and deductible.
– Calculations not affected by exposure
changes
• Comparison of renewal and expiring rates not
premium
Renewal Report Formulas
• Normalization Factor = Current Factors at Renewal Level
Current Factors at Expiring Level
• Normalized Renewal Premium =
Renewal Premium
Normalization Factor
• Normalized Renewal Rate = Normalized Renewal Premium
Renewal Exposures
• Expiring Rate = Expiring Premium / Expiring Exposures
• Rate Change % = Normalized Renewal Rate / Expiring Rate - 1
• Rate Change Premium =
Rate Change % x Expiring Premium
Renewal Report Example
Renewal
Expiring
Change
Premium
13,500
10,000
35%
Exposures
125
110
14%
Limit
1,000,000
500,000
ILF $1M
1.35
ILF $500k
1.25
Normalization Factor = ILF $1M / ILF 500k = 1.35 / 1.25 =
1.08
Normalized Renewal Premium = Premium / NF = 13,500 / 1.08 =
12,500
Normalized Rate = Normalized Renewal Premium / Exposure =
100
Expiring Rate = Expiring Premium / Expiring Exposure =
91
Rate Change =
10%
Price Monitor Formulas
• Standard Report
– Measures judgment modification usage
(e.g. Schedule Credits / Debits)
– May include Experience Modification
• As counter-balance to Schedule and IRPM mods
Standard Report Formulas
• Standard Premium =
Charged Premium
Product of Judgment Modifications
• Average Judgment Modifications =
Sum of Charged Premium
Sum of Standard Premium
Price Monitor Formulas
• Benchmark Report
– Comparison of Final Rates rates across years
or to a benchmark
Benchmark Report Formulas
Benchmark Normalizing Factor (BNF) =
Factor reflecting Policy coverage relative to a common coverage
Normalized Exposure Base = Exposures x BNF
Global Benchmark Rate =
Sum of Charged Premium
Sum of Normalized Exposure Base
Policy Level Benchmark Premium =
Global Benchmark Rate x Policy’s BNF x Exposures
Ratio to Benchmark =
Charged Policy Premium
Policy Level Benchmark Premium
Benchmark Report Example
Premium
13,500
Exposures
125
Limit
1,000,000
ILF $1M
1.35
Basic Limit
100,000
Benchmark Normalizing Factor = ILF $1M =
1.35
Normalized Exposure Base = Exposures x BNF = 125 x 1.35 =
169
Global Benchmark Rate at Basic Limit = from totals
90
Policy Level Benchmark Premium = 90 x 1.35 x 125 =
15,188
Ratio to Benchmark = 13,500 / 15,188 =
.89
Price Monitor Formulas
Renewal & Benchmark Normalizing Factors
• Pertinent to premium determination
• Available & Reliable
• Examples
– GL – ILF, deductible, term
– Auto Liability – ILF, deductible, term
– Fire Building – deductible, coinsurance,
inflation guard, agreed amount, replacement
Price Monitor Data Collection
• Matching Pricing to Reporting records
• Reasons Premiums may not be monitored
Price Monitor Data Collection
Matching of Pricing to Reporting
• Pricing records are at a very detailed level
(vehicle, location, building, etc…).
• Pricing records on in-force basis.
• Reporting records are summarized and
transaction based
– Summarized to class, territory, coverage levels
– Includes mid-term end., short-term coverage, cancellations
– Coverage term not policy term basis
• Pricing fields must be adjusted, summed, or
averaged to the Reporting record level.
Price Monitor Data Collection
Reasons Premiums not Monitored
•
•
•
•
Unable to match Pricing records to Reporting records.
Pricing premium does not tie to Reporting premium.
Miscoded Pricing records
Pricing records lack detail needed for calculations
(e.g. external rating – umbrella, boiler & machine)
• Rates based on underwriter’s judgment
(e.g. a-rated GL, inland marine)
• Exclude records or policies that distort the final report.
(e.g. problems averaging pricing factors)
• Exclusion of insignificant coverages.
Price Monitor
Reporting
• Reporting Basics
• Price Monitor Reports
• Price Monitor Premium to Reporting
Premium Report
• Additional Uses of Data
Reporting Basics
• Price Monitor calculation fields are on a
dollar basis to aid in averaging later.
• The records may not pass into all the
Reports
– New policies would not reach Renewal Report
– Different fields needed for calculations
– Results may be counter intuitive
• e.g. Rate Increase with declining Judgment Mod
Price Monitor Reports
• Senior Management Reports
–
–
–
–
Year / Quarter / Month
Line / Coverage
New vs. Renewal
Market Segment
• Field & Market Segment Manager Reports
– Region / Branch Office / Underwriter
– State
– Policy
• Price Monitor vs. Reporting Premium Report
Price Monitor
Price Monitor vs. Reporting Report
• Demonstrates how much reported premium is being
monitored.
• Provides general description of pockets not monitored.
• Identify blind spots or changes in book
• Satisfy internal control requirements in Sarbanes-Oxley
Pricing Monitor Data
Other Uses
• Provides detailed changes for on-level calculations.
– Territory and class analysis
– Only renewed coverages may be considered
• Detailed Rate Effect calculations
– Underlying rates, factors and exposures readily available
– Enhance understanding of rating practices.
• Completion of filing forms
• Use of Judgment Modification in Experience Exhibits
– Assist in explaining effect of schedule mod usage on profitability
– Assist in developing loss ratio projections.