Ratio Formulas for Insurance

Document Sample
Ratio Formulas for Insurance Powered By Docstoc
					   PRICE MONITOR
Practical Considerations


            Casualty Actuarial Society
            2005 Ratemaking Seminar
            John Ferraro FCAS, MAAA
        Philadelphia Insurance Companies
              Price Monitor

• Price Monitor Formulas
• Price Monitor Data Collection
• Price Monitor Reporting
     Price Monitor Formulas
• Renewal Report
• Standard Report
• Benchmark Report
      Price Monitor Formulas
• Renewal Report
  – Calculate rate changes on expiring coverage
  – Adjusts renewal premium to expiring
    coverage level
    • Adjustment to expiring limit and deductible.
  – Calculations not affected by exposure
    changes
    • Comparison of renewal and expiring rates not
      premium
      Renewal Report Formulas
• Normalization Factor = Current Factors at Renewal Level
                         Current Factors at Expiring Level

• Normalized Renewal Premium =      Renewal Premium
                                    Normalization Factor

• Normalized Renewal Rate = Normalized Renewal Premium
                              Renewal Exposures

• Expiring Rate = Expiring Premium / Expiring Exposures

• Rate Change % = Normalized Renewal Rate / Expiring Rate - 1

• Rate Change Premium =     Rate Change % x Expiring Premium
          Renewal Report Example
                Renewal          Expiring         Change
Premium         13,500           10,000           35%
Exposures       125              110              14%
Limit           1,000,000        500,000
ILF $1M         1.35
ILF $500k       1.25

Normalization Factor = ILF $1M / ILF 500k = 1.35 / 1.25 =     1.08
Normalized Renewal Premium = Premium / NF = 13,500 / 1.08 =   12,500

Normalized Rate = Normalized Renewal Premium / Exposure =     100

Expiring Rate = Expiring Premium / Expiring Exposure =        91

Rate Change =                                                 10%
     Price Monitor Formulas
• Standard Report
  – Measures judgment modification usage
     (e.g. Schedule Credits / Debits)
  – May include Experience Modification
    • As counter-balance to Schedule and IRPM mods
    Standard Report Formulas
• Standard Premium =
            Charged Premium
     Product of Judgment Modifications

• Average Judgment Modifications =
               Sum of Charged Premium
               Sum of Standard Premium
      Price Monitor Formulas
• Benchmark Report
  – Comparison of Final Rates rates across years
    or to a benchmark
   Benchmark Report Formulas
Benchmark Normalizing Factor (BNF) =
  Factor reflecting Policy coverage relative to a common coverage

Normalized Exposure Base = Exposures x BNF

Global Benchmark Rate =      Sum of Charged Premium
                          Sum of Normalized Exposure Base

Policy Level Benchmark Premium =
                Global Benchmark Rate x Policy’s BNF x Exposures

Ratio to Benchmark =       Charged Policy Premium
                       Policy Level Benchmark Premium
        Benchmark Report Example
Premium              13,500
Exposures            125
Limit                1,000,000
ILF $1M              1.35
Basic Limit          100,000



Benchmark Normalizing Factor = ILF $1M =                    1.35

Normalized Exposure Base = Exposures x BNF = 125 x 1.35 =   169

Global Benchmark Rate at Basic Limit = from totals          90

Policy Level Benchmark Premium = 90 x 1.35 x 125 =          15,188

Ratio to Benchmark = 13,500 / 15,188 =                      .89
      Price Monitor Formulas
Renewal & Benchmark Normalizing Factors
• Pertinent to premium determination
• Available & Reliable
• Examples
  – GL – ILF, deductible, term
  – Auto Liability – ILF, deductible, term
  – Fire Building – deductible, coinsurance,
    inflation guard, agreed amount, replacement
  Price Monitor Data Collection
• Matching Pricing to Reporting records

• Reasons Premiums may not be monitored
   Price Monitor Data Collection
  Matching of Pricing to Reporting
• Pricing records are at a very detailed level
      (vehicle, location, building, etc…).
• Pricing records on in-force basis.
• Reporting records are summarized and
  transaction based
   – Summarized to class, territory, coverage levels
   – Includes mid-term end., short-term coverage, cancellations
   – Coverage term not policy term basis
• Pricing fields must be adjusted, summed, or
  averaged to the Reporting record level.
      Price Monitor Data Collection
    Reasons Premiums not Monitored
•   Unable to match Pricing records to Reporting records.
•   Pricing premium does not tie to Reporting premium.
•   Miscoded Pricing records
•   Pricing records lack detail needed for calculations
        (e.g. external rating – umbrella, boiler & machine)
• Rates based on underwriter’s judgment
        (e.g. a-rated GL, inland marine)
• Exclude records or policies that distort the final report.
        (e.g. problems averaging pricing factors)
• Exclusion of insignificant coverages.
             Price Monitor
              Reporting
• Reporting Basics
• Price Monitor Reports
• Price Monitor Premium to Reporting
  Premium Report
• Additional Uses of Data
              Reporting Basics
• Price Monitor calculation fields are on a
  dollar basis to aid in averaging later.

• The records may not pass into all the
  Reports
  – New policies would not reach Renewal Report
  – Different fields needed for calculations
  – Results may be counter intuitive
     • e.g. Rate Increase with declining Judgment Mod
              Price Monitor Reports
• Senior Management Reports
   –   Year / Quarter / Month
   –   Line / Coverage
   –   New vs. Renewal
   –   Market Segment


• Field & Market Segment Manager Reports
   – Region / Branch Office / Underwriter
   – State
   – Policy


• Price Monitor vs. Reporting Premium Report
          Price Monitor
Price Monitor vs. Reporting Report
• Demonstrates how much reported premium is being
  monitored.

• Provides general description of pockets not monitored.

• Identify blind spots or changes in book

• Satisfy internal control requirements in Sarbanes-Oxley
              Pricing Monitor Data
                   Other Uses
• Provides detailed changes for on-level calculations.
   – Territory and class analysis
   – Only renewed coverages may be considered

• Detailed Rate Effect calculations
   – Underlying rates, factors and exposures readily available
   – Enhance understanding of rating practices.

• Completion of filing forms

• Use of Judgment Modification in Experience Exhibits
   – Assist in explaining effect of schedule mod usage on profitability
   – Assist in developing loss ratio projections.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:39
posted:7/28/2011
language:English
pages:20
Description: Ratio Formulas for Insurance document sample