Question

Boiler Insurer operates in State W, which has three classification territories. It wants to assess the impact on each territory of a potential rate increase. You are given the following data. Current Earned premiums Experience Territory relativity Z at current rates loss 1 1.00 1.00 60,000 30,000 2 1.20 0.70 24,000 13,200 3 0.80 0.80 30,000 16,125 The compliment of credibility (Z) is applied to the current relativity factor, and the existing base rate is $100 (in Territory 1). If Boiler Insurer adopts a statewide rate level increase of +5% overall, calculate the new rates for Territories 1, 2, and 3 using the loss cost method

Answer 1

The new rates for Boiler Insurer's territories are calculated using the loss cost method by adjusting the base rate for territory relativity and experience loss ratios, ensuring that rates cover claims, costs, and profits, thus achieving actuarial fairness.

Step-by-step explanation:

The Boiler Insurer's task of calculating new rates for different territories using the loss cost method involves factoring in a statewide rate level increase and the specific territory relativities and experience loss ratios. Given that loss cost adjustment should reflect the need to cover claims, administrative costs, and insurance company profits, this type of calculation is crucial for maintaining actuarial fairness.

For each territory, the new rate should be calculated by adjusting the base rate in Territory 1 for the territorial relativity, and then applying the experience loss ratio to determine the level of adjustment needed. This ensures that the expected losses and costs are appropriately accounted for when the insurer is setting rates for each risk group.

By taking into account the difference in risks among groups, the company aims to set rates that are actuarially fair - meaning an average person's premium payments will over time cover their claims, the costs to the insurer, and allow for profit.