SOP.Ratemaking

Reading: Statement of Principles Regarding Property and Casualty Insurance Ratemaking, Casualty Actuarial Society, adopted November 1988.

Study Tips

You should probably at least glance at the source text for the Statement of Principles for Ratemaking because it is a foundational document. Aside from the 4 principles however, there is no real testable material. The rest of it is covered elsewhere in the syllabus anyway.

Estimated study time: 30 minutes (not including subsequent review time)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• this reading has not been tested on any exam from the year 2012 and subsequent

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

In Plain English!

The 4 Principles

Ratemaking is prospective because the property and casualty insurance rate must be developed prior to the transfer of risk.

Principle 1: A rate is an estimate of the expected value of future costs.

Ratemaking should provide for all costs so that the insurance system is financially sound.

Principle 2: A rate provides for all costs associated with the transfer of risk.

Ratemaking should provide for the costs of an individual risk transfer so that equity among insureds is maintained. When the experience of an individual risk does not provide a credible basis for estimating these costs, it is appropriate to consider the aggregate experience of similar risks. A rate estimated from such experience is an estimate of the costs of the risk transfer for each individual in the class.

Principle 3: A rate provides for the costs associated with an individual risk transfer.

Ratemaking produces cost estimates that are actuarially sound if the estimation is based on Principles 1, 2, and 3. Such rates comply with four criteria commonly used by actuaries: reasonable, not excessive, not inadequate, and not unfairly discriminatory.

Principle 4: A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.

You should memorize these principles. They are sometimes referenced in a general way in exam questions or solutions.

Alice has a few more comments about these principles. It's an advanced discussion that goes a little beyond the official syllabus. If you're interested, click on the link in the previous sentence.