Werner Ch 14

  1. Non-Pricing Solutions
    • 1. Expense Reductions
    • 2. Reducing Average Expected Loss: Change in mix of business
    • 3. Reduce coverage provided by policy
    • 4. Institute better loss control procedures
  2. Potential actions to change mix of business
    • Tighten underwriting criteria
    • Non-renew policies that are signi ficantly underpriced
  3. What are the necessary steps in calculating new rates for an existing product?
    • 1. Select an overall average premium target for the future policy
    • 2. Finalize the structure of the rating algorithm
    • 3. Select the fi nal rate diff erentials for each of the rating variables
    • 4. Calculate proposed fixed expense fees, if applicable
    • 5. Derive the base rate necessary to achieve the overall average premium target
  4. Calculation of Fixed Expense Fees and Other Additive Premium
    Ap = Ef / (1 - V - Qt)
  5. Derivation of Base Rate
    • 1. Extension of Exposures Method
    • 2. Approximated Average Rate Diff erential Method
    • 3. Approximated Change in Average Rate Diff erential Method
  6. Describe Extension of Exposures Method
    • Rerate individual policies or unique combinations of rating variables using current rates
    • Using the proposed rate di fferentials and expense fee,calculate average premium
    • Need proposed base rate BP, so start with seed base rate and calculate Ps
    • Calculate Ps
    • Bp = Bs x (Pp - Ap) / (Ps - Ap)
  7. Describe Approximated Average Rate Di fferential Method
    • Need to approximate the average proposed rate diff erential (Sp) and use
    • Approximate Sp as product of the average diff erential of each of the rating variables
    • Bp = (Pp - Ap) / Sp
  8. Describe Approximated Change in Average Rate Diff erential Method
    • Can use change in average rate diff erential 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
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  9. 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
    • Eff ect 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
  10. Expected Distribution used to calculate rate eff ect
    • 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 a ffect demand
  11. Calculating New Rates Based on Bureau or Competitor Rates
    • Company data for similar products
    • Similar products of competitors
    • Information from rating bureaus
  12. Communicating and monitoring proposed rates that apply to new product
    • Regulators: Likely want source of derivation of rates; Some justi cation for judgmental adjustments
    • Company internal management: Want to know expected pro fitability; Competitive position
  13. Communicating and monitoring proposed rates that apply to existing product, more extensive communication
    • 1. Regulators:
    • May require signifi cant detail on methodology used
    • Detailed policyholder premium impacts
    • 2. Company internal management: Want to understand impact on Competitive position, Expected volume, Expected profi tability
Card Set
Werner Ch 14
Exam 5 TIA Werner ch 14