 TIA EXAM 5  WERNER CH 14.txt
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NonPricing Solutions to imbalance
 1. Expense Reductions
 2. Reducing Average Expected Loss:
 a. Change in mix of business
 b. Reduce coverage provided by policy
 c. Institute better loss control procedures

Potential actions to change mix of business
 Tighten underwriting criteria
 Nonrenew policies that are signi ficantly underpriced

List two Pricing Solutions to Imbalance
 1. Adjust Rates
 2. Expect new UW Profit

What are the necessary steps in calculating new rates for an existing product?
 1. Select an overall average premium target for the future policy
 2. Finalize the structure of the rating algorithm
 3. Select the final rate differentials for each of the rating variables
 4. Calculate proposed fixed expense fees, if applicable
 5. Derive the base rate necessary to achieve the overall average premium target

Calculation of Fixed Expense Fees and Other Additive Premium
Ap = Ef / (1  V  Qt)

Derivation of Base Rate
 1. Extension of Exposures Method
 2. Approximated Average Rate Diff erential Method
 3. Approximated Change in Average Rate Differential Method

Describe Extension of Exposures Method
 Rerate individual policies or unique combinations of rating variables using current rates
 Using the proposed rate differentials and expense fee,calculate average premium
 Need proposed base rate BP, so start with seed base rate and calculate Ps
 Calculate Ps
 Bp = Bs x (Pp  Ap) / (Ps  Ap)

Describe Approximated Average Rate Differential Method
 Need to approximate the average proposed rate differential (Sp) and use
 Approximate Sp as product of the average differential of each of the rating variables
 Bp = (Pp  Ap) / Sp

Describe Approximated Change in Average Rate Differential Method
 Can use change in average rate differential and focus solely on rating variables that are changing
 Weight with current variable premium
 Calculate the proposed base rate using the indicated overall change with the following

Considerations when using premium transition rule (Dictates min/max to apply on renewal to insured)
 Need to determine max/min premium change amounts
 Rules apply only to premium changes directly resulting from rate change: Change in exposures or other risk characteristics should not be included
 Length of time to implement: Depends on rate change and transition rule; Want to avoid long periods to avoid multiple overlapping transition periods created by multiple rate changes
 Effect of average premium level should also be considered and base rate adjusted accordingly: Decide whether want projected average premium over transition period or by the end

Expected Distribution used to calculate rate effect
 Typically use latest inforce exposure distribution to project future distribution: Should adjust for any known changes to happen in prospective period
 Assume rate change will not change the existing portfolio: Validity of assumption depends on product, market conditions, and extent of change
 Price optimization techniques address issue of change in volume and distribution: Considers how rate change is expected to affect demand

Calculating New Rates Based on Bureau or Competitor Rates to price
 Company data for similar products
 Similar products of competitors
 Information from rating bureaus

Communicating and monitoring proposed rates that apply to new product
 Regulators: Likely want source of derivation of rates; Some justication for judgmental adjustments
 Company internal management: Want to know expected profitability; Competitive position

Communicating and monitoring proposed rates that apply to existing product, more extensive communication
 1. Regulators:
 May require significant detail on methodology used
 Detailed policyholder premium impacts
 2. Company internal management: Want to understand impact on Competitive position, Expected volume, Expected profi tability