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.