B.3. One-time Changes

Question 1

Why adjust for one-time changes in ratemaking?

Answer 1

So data is most representative of future policy period being priced.

Question 2

Types of effects of one-time changes

Answer 2

Direct – direct and obvious impacts to premiums, losses, or expenses, all else being equal

Indirect – due to changes in human behavior

Question 3

Why direct effects of coverage INCREASES are difficult to quantify

Answer 3

Historical losses may have been capped a the lower level of coverage (or coverage may not have existed)

Question 4

3 ways to calculate direct effect of coverage change on LOSSES

Answer 4

1. Restate individual claims at new coverage levels
2. Calculate effect on representative groups of claims
3. Simulate losses under new coverage levels

Question 5

2 methods to on-level premiums

Answer 5

1. Extension of exposures : re-rates all historical policies a the policy level using newest rates, then recalculates earned premiums for each period using newest rates
2. Parallelogram method

Question 6

Parallelogram method adv/disadv

Answer 6

A: Quicker to calculate than extension of exposures
D: Assumes policies are written evenly over period.  Aggregate on-level factors produced may not be appropriate for class level ratemaking

Question 7

Ways to correct for uneven writings in parallelogram method

Answer 7

1. Use shorter time periods

2. Aggregate historical data by rate level

Question 8

Parallelogram assumption for losses

Answer 8

Losses are uniformly distributed over the period being used

Question 9

Two ways a benefit change can apply to losses

Answer 9

1. To all losses on policies written after a certain date (slanted line)
2. To all losses occurring after a certain date (vertical line)