# Werner Ch 14

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1. Non-Pricing Solutions
• 1. Expense Reductions
• 2. Reducing Average Expected Loss: Change in mix of business
• 3. Reduce coverage provided by policy
• 4. Institute better loss control procedures
2. Potential actions to change mix of business
• Tighten underwriting criteria
• Non-renew policies that are signi ficantly underpriced
3. 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 fi nal rate diff erentials 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
Ap = Ef / (1 - V - Qt)
5. Derivation of Base Rate
• 1. Extension of Exposures Method
• 2. Approximated Average Rate Diff erential Method
• 3. Approximated Change in Average Rate Diff erential Method
6. Describe Extension of Exposures Method
• Rerate individual policies or unique combinations of rating variables using current rates
• Using the proposed rate di fferentials 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)
7. Describe Approximated Average Rate Di fferential Method
• Need to approximate the average proposed rate diff erential (Sp) and use
• Approximate Sp as product of the average diff erential of each of the rating variables
• Bp = (Pp - Ap) / Sp
8. Describe Approximated Change in Average Rate Diff erential Method
• Can use change in average rate diff erential 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
• 9. Considerations when using premium transition rule
• 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
• Eff ect 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
10. Expected Distribution used to calculate rate eff ect
• 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 a ffect demand
11. Calculating New Rates Based on Bureau or Competitor Rates
• Company data for similar products
• Similar products of competitors
• Information from rating bureaus
12. Communicating and monitoring proposed rates that apply to new product
• Regulators: Likely want source of derivation of rates; Some justi cation for judgmental adjustments
• Company internal management: Want to know expected pro fitability; Competitive position
13. Communicating and monitoring proposed rates that apply to existing product, more extensive communication
• 1. Regulators:
• May require signifi cant detail on methodology used