Ratemaking in a changing environment

Abstract

AbstractIn pricing insurance contracts based on the individual policyholder’s aggregate losses for non-life insurers, the literature has mainly focused on using detailed information from policies and closed claims. However, the information on open claims can reflect shifts in the distribution of the expected claim payments better than closed claims. Such shifts may be needed to be reflected in the ratemaking process earlier rather than later, especially when insurers are experiencing environmental changes. In practice, actuaries use ad hoc techniques to adjust data to current levels to determine premiums. This paper presents an intuitive ratemaking model, employing a marked Poisson process framework, which ensures that the multivariate risk analysis is done more routinely using all reported claims and makes an adjustment for Incurred But Not Reported claims. Utilizing data from the Wisconsin Local Government Property Insurance Fund, we find that by determining rates based on current data, the proposed ratemaking model leads to better alignment of premiums and provides insurers with a more financially sound portfolio.