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Price Monitoring Practical Approaches
CAS 2007 Ratemaking Seminar, session COM-5
Brian A. Hughes
SVP & Chief Actuary
Arch Insurance Group
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Disclaimer

The views expressed here are those of the
speaker and not necessarily the views of
this panel, Arch Insurance Group, the CAS
or any other sponsor of this seminar
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Introduction
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Price Monitoring – what is it and why is it
important?
Method #1 – basic data
Method #2 – more extensive aggregate data
Method #3 – individual policy data
Method #4 – benchmark approach
Method #5 – measuring homogenous books
Summary
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Price Monitoring – What is it?
My definition: a measurement of the
change in effective rate levels from one
period to another
 It does not take into account loss trend
 When loss trend is factored in, it allows a
projection of historical loss ratios to a
future period
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Price Monitoring – Purpose & Uses
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To understand how rate levels are changing over
time while attempting to adjust for exposure
changes
Allows for the projection of historical loss ratios
to a future period for profitability and forecasting
purposes
Allows for measuring whether target rate
changes are being achieved
Allows for measuring whether target returns on
equity are being achieved
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Industry Price Monitoring - CIAB
One source of industry price monitoring is
the survey put out each quarter by the
Council of Insurance Agents & Brokers
 They survey their members and
summarize the rate changes being seen in
the market by line of business & size of
account
 The survey can be found on the Council’s
website at www.ciab.com
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Industry Price Monitoring - Tillinghast
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Tillinghast compiles a quarterly price monitor
survey called CLIPS – Commercial Price
Monitoring Survey
Survey data is captured for all major commercial
lines by size of account and region
Participating companies receive the survey
results and how their company compares to
overall averages
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Method #1 – Basic Data
For some lines of business, only basic
data may be available: policy effective
period, premium, policy limit, (maybe)
attachment point or deductible
 Exposures aren’t available, and individual
policy data may or may not be available
 The accuracy of this method increases as
mix of business change is limited or
renewals can be matched up
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Method #1 - Example
Average
Premium per Rate
million
Change
Total
Premium
Total Limits
Renewal
$448,000
$60,000,000 $7,467
Expiring
$445,000
$57,000,000 $7,807
-4.4%
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Method #1 - Example
Renewal
Expiring
Expiring
premium at
current terms
Company
Premium
Company
Limit
Premium
per million
Policy #1
$75,000
$15,000,000
$5,000
11.9%
$67,000
Policy #2
$217,000
$25,000,000
$8,680
-6.2%
$231,250
Policy #3
$156,000
$20,000,000
$7,800
-11.1%
$175,455
$448,000
$60,000,000
$7,467
-5.4%
$473,705
Policy #1
$67,000
$15,000,000
$4,467
Policy #2
$185,000
$20,000,000
$9,250
Policy #3
$193,000
$22,000,000
$8,773
$445,000
$57,000,000
$7,807
Rate
Change
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Method #1 - Advantages
Can be calculated with a minimum of
information
 If the universe of policies is limited to
renewals with no change in limit or
attachment, the result is more accurate
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Method #1 - Drawbacks
Not adjusting for exposure changes is a
major drawback
 Limiting the calculation to “apples-toapples” policies can eliminate a large
portion of the subject book of business
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Method #2 – Aggregate Data
This method outlines an approach when
only aggregate data (for the renewal and
expiring books of business) is available
 Available data includes: policy effective
period, premium, the company’s policy
limit, the 100% policy limit, and attachment
point or deductible
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Method #2 - Example
Company
Premium
Company
Limit
100% Limit
Attachment
# of
policies
Total
448,000
60,000,000
100,000,000
90,000,000
3
Average
149,333
20,000,000
33,333,333
30,000,000
Total
445,000
57,000,000
99,000,000
91,000,000
Average
148,333
19,000,000
33,000,000
30,333,333
Layer
Exposure
Rate per $1,000
of layer
exposure
Rate Change
1.774
4.210
-5.7%
(ILF at
$63.33 mil
– ILF at
$30 mil)
[Co premium/
(Co limit/1000)]
Layer Exposure
1.749
4.464
3
(ILF at
$63.33 mil
– ILF at
$30.33 mil)
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Method #2 - Advantages
Allows for a more accurate calculation
even though renewals may not be able to
be matched up with their expiring policies
 Takes into account changes in attachment
point and share of layer
 The method can easily be expanded to
incorporate aggregate underlying
exposures and policy term changes
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Method #2 - Drawbacks
Since aggregate data is being used, mix of
business changes are not being captured
 For large account business, one or two
policies can distort the averages and the
result
 Shifts from primary to excess (or vice
versa) can cause distortions (ie. the layer
exposure calculation is only as good as
your ILFs)
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Method #3 – Individual Policy Data
This method matches up individual policy
renewals and calculates a rate change for
each renewal
 Available data needed for each policy –
both renewal and expiring: policy effective
period, premium, the company’s policy
limit, the 100% policy limit, attachment
point or deductible, exposure and policy
term
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Method #3 - Example
Total
Attach
Underlying
Exposures
Policy
Term
Layer
Expos
Rate per $1,000
of Layer
Exposure
Renewal
Co Prem
Policy #1
75,000
15,000,000
25,000,000
25,000,000
26,000,000
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1.599
3.007
9.4%
68,569
Policy #2
217,000
25,000,000
25,000,000
15,000,000
57,000,000
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2.121
1.795
3.7%
209,226
Policy #3
156,000
20,000,000
50,000,000
50,000,000
55,000,000
10
1.725
4.932
-12.9%
179,205
448,000
60,000,000
100,000,000
90,000,000
138,000,000
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1.774
3.230
-2.0%
457,000
100% Limit
Expiring
3.230 / 3.311 =
Policy #1
67,000
15,000,000
30,000,000
20,000,000
23,500,000
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2.074
2.749
Policy #2
185,000
20,000,000
25,000,000
15,000,000
63,000,000
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2.121
1.730
Policy #3
193,000
22,000,000
44,000,000
56,000,000
47,000,000
12
1.450
5.666
445,000
57,000,000
91,000,000
133,500,000
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1.749
3.311
99,000,000
Rate
Chg
Expiring
Prem at
current terms
Company
Limit
-2.4%
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Method #3 - Example
Calculation of Rate per $1,000 of Layer Exposure
Co premium / (co limit/100% limit) x (12/term)
Underlying exposures x layer exposure
Where layer exposure reflects the amount of
exposure within the subject layer (using ILFs
or size of loss curves)
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Method #3 - Advantages
An effective rate change is calculated for
each and every renewal
 This eliminates distortions within a book of
business
 Additional adjustments can be added on a
per policy basis. For example, if a
coverage was eliminated at renewal, an
estimated effect of that coverage change
could be reflected
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Method #3 - Drawbacks
While this is the ideal calculation to be
done for renewals, it does not reflect new
business rate levels
 Reflecting terms and conditions changes
can be difficult to estimate and capture on
books of business with large numbers of
policy counts
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Method #4 - Benchmarking
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This method requires a standardized or “benchmark
rate” to be used to calculate a “benchmark premium” for
each policy
The benchmark rates must reflect all exposures
It can be a manual rate plan or something similar
Changes to the benchmark rates must be tracked over
time; alternatively, they can be set and “locked”
The ratio of actual to benchmark is tracked over time
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Method #4 - Example
New/
Ren
Company
Premium
Company
Limit
100% Limit
Attachment
Underlying
Exposures
Policy
Term
Benchmark
Rate
Layer Exposure
Benchmark
Premium
Actual/
Benchmark
Policy #1
Ren
75,000
15,000,000
25,000,000
25,000,000
26,000,000
12
3.000
1.599
74,832
1.002
Policy #2
Ren
217,000
25,000,000
25,000,000
15,000,000
57,000,000
12
2.000
2.121
241,830
0.897
Policy #3
Ren
156,000
20,000,000
50,000,000
50,000,000
55,000,000
10
3.456
1.725
109,312
1.427
Policy #4
New
123,000
10,000,000
20,000,000
10,000,000
37,000,000
12
3.500
2.207
142,890
0.861
Policy #5
New
89,000
5,000,000
10,000,000
10,000,000
19,000,000
12
6.000
1.328
75,672
1.176
Policy #6
New
45,000
15,000,000
50,000,000
50,000,000
45,000,000
12
2.200
1.725
51,240
0.878
Total
Ren
448,000
425,974
1.052
Total
New
257,000
269,802
0.953
Grand
Total
705,000
695,776
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1.013
Method #4 - Example
Calculation of Benchmark Premium
Benchmark rate x exposures x layer exposure
x (Company limit/100% limit) x (term/12)
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Method #4 - Advantages
Benchmarking allows for tracking both
new and renewal business, or more
importantly, whether one is priced stronger
or weaker than the other
 Many lines of business already have a well
established benchmark – manual rates
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Method #4 - Drawbacks
This method can produce misleading
results if the relative rate adequacy of the
benchmark rates varies for different
classes, territories and coverage
 Tracking benchmark rates that change
over time can be cumbersome
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Method #5 – Homogenous Books
This method calculates an overall change
in rate level on an entire book of business
 The risks must be fairly homogenous with
a standardized rating base
 Last year’s average rate level is adjusted
to this year’s mix of business and then
compared to this year’s average rate level
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Method #5 – Example
Renewal
Premium
Policy Limit
Underlying
Exposures
Average
Rate
Average
Policy Limit
Average
Limit
ILF
Rate
Change
Adjusted
Expiring
Premium
Class #1
576,000
1,228,000,000
2,451
235
501,020
0.621
-0.8%
$580,361
Class #2
487,000
927,000,000
2,239
218
414,024
0.538
-3.6%
$504,960
Class #3
1,123,000
1,962,000,000
3,987
282
492,099
0.612
13.8%
$986,724
2,186,000
4,117,000,000
8,677
252
474,473
5.5%
$2,072,045
Adjusted
Avg Rate
Expiring
Class #1
623,000
1,367,000,000
2,491
250
548,776
0.656
237
Class #2
598,000
1,150,000,000
2,298
260
500,435
0.621
226
Class #3
945,000
1,921,000,000
3,660
258
524,863
0.639
247
2,166,000
4,438,000,000
8,449
256
525,269
239
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Method #5 - Advantages
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A fairly accurate rate change can be
calculated across the entire book
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Method #5 - Drawbacks
Many classes, territories and coverage
sections can quickly make this a complex
calculation
 This method is not practical or accurate for
many commercial lines of business
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Large Account Challenges
Terms and conditions including coverage
sublimits and exclusions are very difficult
to measure
 The accuracy of ILF’s at higher limits is
questionable
 Should risk loaded ILF’s be used?
 Is a renewal a renewal?
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Practical Issues
Each line of business may have different
price monitor components that are
important – requiring different database
structures
 Garbage in, garbage out
 The results need to feed back to
Underwriting, Reserving, and Senior
Management
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More Practical Issues
Should benchmark premium be displayed
at time of pricing?
 Should a credibility index be assigned for
different methods and lines of business?
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Summary
There are many ways to monitor rate
levels – how accurate the method usually
depends on the available data
 There are no perfect methods – identifying
possible weaknesses in the approach may
determine how heavily the results are
relied upon
 Any method is better than none at all! Start
with a simple method and build on it over
time
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