Structures actuarial pricing analysis with loss cost estimation, expense loading, and rate adequacy testing. Use when analyzing premium rates, calculating rate indications, or assessing pricing adequacy.
Structures actuarial pricing analysis with loss cost estimation, expense loading, and rate adequacy testing.
On-level premium — Restate historical earned premiums to current rate level using cumulative rate change factors. Verify each rate change effective date and confirm whether changes were applied uniformly or varied by sub-segment.
Develop losses to ultimate — Apply selected loss development factors to each accident year. If using a blend of methods (paid vs. incurred, chain-ladder vs. Bornhuetter-Ferguson), document selections and rationale. Flag any years with large losses or abnormal development patterns.
Trend losses to prospective period — Apply annual frequency and severity trend factors to bring ultimate losses from historical midpoint to the future policy period midpoint. State the trend period explicitly (e.g., from AY 2022 midpoint to prospective period midpoint of 7/1/2027). [VERIFY trend selections against industry studies or internal actuarial memoranda]
Calculate pure loss cost indication — Divide trended ultimate losses by on-level earned premium for each year to produce loss ratios. Select an all-year weighted or ex-cat weighted average, excluding or capping anomalous years with stated justification.
Apply expense and profit loading — Build up the permissible loss ratio:
Derive rate indication — Indicated rate change = (selected loss ratio ÷ permissible loss ratio) − 1.0. Express as a percentage change. Break out the indication by major drivers (loss trend, development, expense changes, profit target adjustment).
Assess rate adequacy — Compare indicated premium to current charged premium. Identify segments where adequacy diverges materially. If reinsurance pricing is in scope, evaluate the adequacy of ceding commissions relative to underlying expense loads and loss experience.
Sensitivity testing — Test key assumptions: