1. Ratemaking Actuarial functions Ratemaking Loss reserving
Data collection and analysis
Profitability analysis
Competitive analysis
Prepare statistical reports
Mergers and acquisitions
Planning
Actuarial services
Staff actuaries
Consulting actuaries
Advisory organizations
ISO (Insurance Services Office)
AAIS (American Association of Insurance Services)
NCCI (National Council of Compensation Insurers)
SAA (Surety Association of America)

2. Ratemaking Principles
Corporate objectives
Stable
Responsive
Promote loss control
Cover contingencies
Understandable
Regulatory objectives
Rates must be:
Adequate
Not excessive
Not unfairly discriminatory

3. Ratemaking Process Terminology In a stable world:
Gross Rate = Pure Premium + Expense Loading + P&C Provision
Pure Premium = Claims & Loss Adjustment Expense
Expense loading = Production & Operating Expenses
Profit and contingencies (P&C) =
Return on Capital and Risk Loading
Exposure unit = Measure of loss exposure assumed by insurer
Written premium = premiums booked
Earned premium = pro-rata portion of premiums exposed to loss
In a stable world:
Calculate amount needed:
To pay claims
To pay expenses
Add these together to find
the rate

4. Ratemaking in the Real World
Loss reserves
Case reserves
Incurred But Not Reported (IBNR)
Inflation (Economic & Non-Economic)
Other time dependent factors (auto insurance)
Traffic density
Law enforcement efforts
Legal rules governing loss settlements
Trending adjusts for time dependent factors
Severity = average loss
Frequency = number of claims per exposure
Exposure if inflation sensitive

5. Risk Classification For automobile insurance Age of driver
Sex and marital status of driver
Type of vehicle
Use of vehicle
Driving record of driver
Mileage driven
Territory where vehicle is garaged

6. Ratemaking Methods Judgment method Loss ratio method
Percent rate change = (A-E)/E
A = Actual loss ratio
E = Expected loss ratio
Pure premium method
G = (P+F)/(1-V-Q)
G = Gross premium
P = Pure premium
F = Fixed expenses
V = Variable expenses
Q = Profit & Contingency

7. Examples Loss Ratio Method Actual LR = 75% Expected LR = 68%
Percent rate change =
(75-68)/68 = +10.3%
Pure Premium Method
Pure premium = $400
Fixed expenses = $50
Variable expenses = 25%
Profit & Contingency = -2%
Gross premium =
(400+50)/( ) = 584

8. Other Factors in Ratemaking
Investment Profit
Sources:
Investment income
Realized capital gains
Unrealized capital gains
Earned By:
Loss Reserve
Unearned Premium Reserve
Amount Varies by Length of Payout Pattern
Rate Regulation
Statutory standards
Administration
State-made rates
Mandatory bureau
membership
Prior Approval
File and Use/Use and File
No filing required

9. Development of Data Collection of statistics Policy year Calendar year
Accident year
Calendar year calculations
Earned Premium = Beginning UEP Reserve + Written Premium - Ending UEP Reserve
Incurred Losses =
Paid Losses + Ending Loss Reserve - Beginning Loss Reserve

10. Ratemaking Adjustment of statistics Loss development factors
Current Rate Level
Trending
Linear
Exponential
Econometric
Territorial relativities
Class relativities

11. Example – Pure Premium Method
1999 Incurred Losses = $10,000,000
Trend Factors
Frequency = 1.02
Severity = 1.04
Rates for coverage in effect for 2003
Number of years of trending = 4
Trended incurred losses = 10,000,000x(1.02)4x(1.04)4= 12,662,923
Earned exposures for 1999 = 20,000
Pure premium = 12,662,923/20,000 =

12. Example – Loss Ratio Method
Trended incurred losses = 12,662,923
1999 Earned Premium = 13,698,630
+13% Rate Change in 2001
1999 “On-Level” Earned Premium = 15,479,452
Actual Loss Ratio = 12,662,923/15,479,452
= 0.818
Indicated Rate Change = ( )/0.73
= +12.1%

13. Rate Filings Schedule of proposed rates
Percentage change in statewide average rates
Percentage change by territory and class
Statistical support for changes
Investment income calculation
Expense loading data
Explanatory material