E.2 Implementation

Question 1

Steps to obtain new rates for an existing product

Answer 1

-Select target overall average premium (or overall rate
change)
-Finalize the rating algorithm
-Select final new rates for each rating variable
-Select final additive amounts (e.g., expense fees) if
applicable
-Derive final base rate needed to achieve the target premium

Question 2

Fixed Expense Fee formula

Answer 2

Fixed Expense Fee per Exposure = Fixed Expense per Exposure / ( 1 -

Question 3

Formula for new base rate without rating factor

changes

Answer 3

Bp = Bc x (Pp - Feep) / (Pc - Feec)

Question 4

Formula for new base rate using Extension of

Exposures

Answer 4

Bp = Bs x (Pp - Feep) / (Ps - Feep)

Question 5

Formula for new base rate using Average Rate

Differential

Answer 5

Bp = (Pp - Feep) / (Proposed Average Factor)

Question 6

Formula for new base rate using Change in Average

Rate Differential

Answer 6

Bp = Bc x (Pp - Feep) / (Pc - Feep) x Off - Balance Factor

Question 7

Advantages and Disadvantages of using Extension of

Exposures to obtain new base rate

Answer 7

Advantage: Most accurate method
Disadvantage: Requires detailed data and calculations

Question 8

Advantages and Disadvantages of using
Approximated Average Rate Differential method to
obtain new base rate

Answer 8

Advantage: Doesn’t require detailed exposure data
Disadvantages: Less accurate than extension of exposures due to distributional bias, and requires calculating the average factor for all variables in the rating plan (even variables with rates that aren’t changing)

Question 9

Advantages and Disadvantages of using
Approximated Change in Average Rate Differential
method to obtain new base rate

Answer 9

Advantage: Doesn’t require detailed exposure data, and only requires looking at variables with rates that are changing
Disadvantages: Less accurate than extension of exposures due to distributional bias

Question 10

Purpose of minimum premiums, and formulas used
to calculate effect and offset for introducing a
minimum premium

Answer 10

Purpose: To make sure premiums for each policy are large enough to cover expected fixed expenses and some minimal amount of expected losses.
Effect = (Prem with Min / Prem without Min) - 1
Base Rate Offset = 1 / (1 + Effect)

Question 11

Steps to capping a non-base level of a variable (for a

rate increase cap)

Answer 11

-Lower the factor for the level to comply with cap
-Increase the base rate to make up lost premium
-Lower the factor for the level as a result of base rate increase

Question 12

Steps to capping a base level of a variable (for a rate

increase cap)

Answer 12

-Lower the base rate to comply with cap
-Increase the factors for non-base levels to make up lost
premium from applying the cap
-Re-increase the factors for non-base levels to make up lost premium from the base rate decrease

Question 13

Considerations when implementing a premium

transition rule

Answer 13

- Determining the cap amounts, perhaps based on profit
scenario testing.
-The rules should allow for some large changes (e.g., changes in exposure, or claim surcharges), but should limit the impact of rate changes.
-Shorter transition periods are preferable, especially since multiple rate change transition rules can start to overlap.
-You need to decide on how to implement (and file the
change).