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Price Monitoring Practical Approaches
CAS 2006 Ratemaking Seminar, session COM-6
Brian A. Hughes
SVP & Chief Pricing 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
Tillinghast has recently started to compile
a quarterly price monitor
 Survey data is being 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
12
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
12
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
Benchmark
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
Adjusted
Avg Rate
Class #1
576,000
1,228,000,000
2,451
235
501,020
0.621
Class #2
487,000
927,000,000
2,239
218
414,024
0.538
Class #3
1,123,000
1,962,000,000
3,987
282
492,099
0.612
2,186,000
4,117,000,000
8,677
252
474,473
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
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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
Rate Change
5.5%
Expiring
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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