1. Methods for Including Investment Income in Rates
Richard A. Derrig, PhD
President, Opal Consulting LLC
Visiting Professor, Temple University
CAS Ratemaking Seminar
March 17, 2008
Boston, MA

2. Major Regulatory Changes, 1970-2000
Massachusetts Private Passenger Automobile Insurance
Year
Regulation
1971
No-fault auto insurance effective
1975
State rate-setting extended to all auto coverages
1977
Competitive rate-setting allowed
1978
State rate-setting reinstituted
1989
Automobile Insurance Reform Law effective
1991
Insurance Fraud Bureau began operation
1996
Competitive Discounts and Deviations begin at -7.4%
2006
Competitive Discounts and Deviations stabilize at -1.7%
2007
Competitive rate-setting allowed 4/1/08

3. MASS PPA MANAGED COMPETITION
Effective April 1, 2008
New Regulation (211CMR 79) and Filing Forms
Underwriting Profit Calculation Required
“Reasonable Return on Capital”
“Due Consideration of Investment Income”
Filing Form, Sheet 8: Show How Investment Income is Considered in Rate Calculation
No Required Method

4. First Round for April 1, 2008 General Ingredients
Expected Income
Invested Assets
Capital at Risk, Return Expected
Premium Held
Loss, Expense, and Taxes
Model Framework

5. First Round for April 1, 2008 Specific Ingredients
Expected Income: Embedded v Prospective
Invested Assets: Calendar v Policy Flows
Capital at Risk: Proportional Premium v Reserve
Return Expected: Management v Market
Premium Held: Policy Term v Flow
Loss, Exp, Taxes: Policy Term v Flow
Model Framework: Cal Year Acct v Cash Flow

6. Initial Profit Provisions Liability v Physical Damage

7. Initial Return on Equity/Capital Pre-Tax Return on Investment

8. Initial Return on Equity/Capital Rate Change from 2007

9. Modeling Supply and Demand Prices
Modeling Framework Depends on Supply or Demand Pricing
Supply Paradigm: IRR Cash Flow Models
Demand Paradigm: Myers-Cohn Model
Equilibrium for expected market clearing.
Short description and references available