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 RenewalExpiringChange Premium13,50010,00035% Exposures % Limit1,000,000500,000 ILF $1M1.35 ILF $500k1.25 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 Premium13,500 Exposures125 Limit1,000,000 ILF $1M1.35 Basic Limit100,000 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 totals90 Policy Level Benchmark Premium = 90 x 1.35 x 125 =15,188 Ratio to Benchmark = 13,500 / 15,188 =.89

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 Formulas

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.