implementation

Question 1

Calculating new rates for existing product

Answer 1

• select target overall avg prem or RC
• finalize rating algorithm
• select final new rates for each RV
• select final additive amounts
• derive final base rate needed to achieve target prem

Question 2

Expense Fees

Answer 2

• premium can be split into multiplicative and additive portions of rating algorithm
• multiplicative = base rate and all RVs
• additive = fixed expense fee

Question 3

fixed expense fee per exposure

Answer 3

fixed expense per exposure/(1-V-Q)

Question 4

deriving new base rate without rating factor changes

Answer 4

• can simply change base rate
• need to decide whether to change additive component or not

proposed BR = curr BR * (prop avg prem - prop add fee)/(curr avg prem - curr add fee)

Question 5

deriving new base rate with rating factor changes

Answer 5

1. EoE
2. Approximated average rate differential
3. Approximated change in average rate differential

Question 6

EoE

Answer 6

• rerate all policies using all new rates and seed base rate then calc new base rate
• most accurate but requires detailed data and calculations

prop BR = seed BR * (prop avg prem - prop add fee)/(avg prem with see & new rate - prop add fee)

Question 7

Approximated average rate differential

Answer 7

• calc proposed exposure-weighted avg rating factor then calc new base rate
• approximated by calc exposure weighted avg new rating factor for each RV and multiply them together
• less accurate since it ignores distributional bias between RVs
• can make more accurate by weighting by current variable prem at base levels

prop BR = (prop avg prem - prop add fee)/prop avg rating factor

Question 8

Approximated change in average rate differential

Answer 8

• calc change in average rating factor instead of calculating factor directly and take inverse of this to get off-balance factor
• approximated by calc off-balance factor for each RV for which we are changing rates and mult together to get total off-balance
• less accurate than EoE
• takes less time since looking at only RVs that are changing

prop BR = curr BR * (prop avg prem - prop add fee)/(curr avg prem - curr add fee) *OBF

-can make more accurate by weighting by current variable prem at base levels

Question 9

OBF

Answer 9

OBF=Πexposure weighted current rel i/Πexposure weighted proposed rel i

Question 10

change in exposure-weighted avg relativity

Answer 10

change in exposure-weighted avg relativity = exposure weighted proposed/exposure weighted current-1

Question 11

minimum premiums

Answer 11

-used to make prem for individual policy will cover expected fixed expenses and some minimal amount of expected losses

effect = (prem with min/prem without min)-1

-to approx. offset this prem impact, multiple BR by offset factor

BR offset = 1/(1+offset)

Question 12

rate capping: non-base level

Answer 12

• lower factor for that level and then increasing BR to makeup for lost premium, then readjust factor for capped level downwards due to BR increase in order to maintain same capped amount
• relatibity adjustment is only for level being capped

Question 13

rate capping: base level

Answer 13

• lower base rate and then increasing factors for other levels to makeup for lost premium -> increase in other factors will have to make up for prem lost from cap and prem reduction from base rate decrease
• calc relativities for each non-base level using final rel adj (BL will remain at 1)

Question 14

rate capping for 1 variable

Answer 14

-if want to cap impact of RC for single variable, need to make up any premium loss resulting from cap on other levels of variable to obtain same overall target prem

Question 15

Expected Distribution used for RCs

Answer 15

-usually RCs are measures on impact to in-force OLP, if RCs result in change in MOB, it can alter total prem or profitability if profit varies by class

Question 16

using competitor rates: adjusting competitor expense fee

Answer 16

FE: subject FE per exposure/competitor FE per exposure

Question 17

using competitor rates: adjusting competitor BR and expense fee

Answer 17

VE: Competitor VPLR/subject VPLR

Question 18

using competitor rates: adjusting BR

Answer 18

LCs: subject expected LC/competitor LC

Question 19

shortcut for OBF

Answer 19

OBF = indicated chaenge factor for base level (using LRA)