1. 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
  2. Potential actions to change mix of business
    • Tighten underwriting criteria
    • Non-renew policies that are signi ficantly underpriced
  3. List two Pricing Solutions to Imbalance
    • 1. Adjust Rates
    • 2. Expect new UW Profit
  4. 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
  5. Calculation of Fixed Expense Fees and Other Additive Premium
    Ap = Ef / (1 - V - Qt)
  6. Derivation of Base Rate
    • 1. Extension of Exposures Method
    • 2. Approximated Average Rate Diff erential Method
    • 3. Approximated Change in Average Rate Differential Method
  7. 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)
  8. 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
  9. 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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  10. 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
  11. 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
  12. Calculating New Rates Based on Bureau or Competitor Rates to price
    • Company data for similar products
    • Similar products of competitors
    • Information from rating bureaus
  13. 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
  14. 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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