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Non-Pricing Solutions to imbalance
- 1. Expense Reductions
- 2. Reducing Average Expected Loss:
- a. Change in mix of business
- b. Reduce coverage provided by policy
- c. Institute better loss control procedures
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Potential actions to change mix of business
- Tighten underwriting criteria
- Non-renew policies that are signi ficantly underpriced
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List two Pricing Solutions to Imbalance
- 1. Adjust Rates
- 2. Expect new UW Profit
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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 final rate differentials 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
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Calculation of Fixed Expense Fees and Other Additive Premium
Ap = Ef / (1 - V - Qt)
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Derivation of Base Rate
- 1. Extension of Exposures Method
- 2. Approximated Average Rate Diff erential Method
- 3. Approximated Change in Average Rate Differential Method
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Describe Extension of Exposures Method
- Rerate individual policies or unique combinations of rating variables using current rates
- Using the proposed rate differentials 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)
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Describe Approximated Average Rate Differential Method
- Need to approximate the average proposed rate differential (Sp) and use
- Approximate Sp as product of the average differential of each of the rating variables
- Bp = (Pp - Ap) / Sp
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Describe Approximated Change in Average Rate Differential Method
- Can use change in average rate differential 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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Considerations when using premium transition rule (Dictates min/max to apply on renewal to insured)
- 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
- Effect 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
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Expected Distribution used to calculate rate effect
- 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 affect demand
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Calculating New Rates Based on Bureau or Competitor Rates to price
- Company data for similar products
- Similar products of competitors
- Information from rating bureaus
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Communicating and monitoring proposed rates that apply to new product
- Regulators: Likely want source of derivation of rates; Some justication for judgmental adjustments
- Company internal management: Want to know expected profitability; Competitive position
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Communicating and monitoring proposed rates that apply to existing product, more extensive communication
- 1. Regulators:
- May require significant detail on methodology used
- Detailed policyholder premium impacts
- 2. Company internal management: Want to understand impact on Competitive position, Expected volume, Expected profi tability
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