ABC Insurance Company has performed an analysis on their Philadelphia Homeowners portfolio and determined a rate increase is necessary to achieve the 56% Target Loss Ratio set by management.

The expected loss ratio of 66% was developed using an actuarial ultimate loss estimate of policies in the Philadelphia area. See tab "HO Data" of the file linked below:

HO Segmentation Fall 2019.xlsx

You believe the claim data can be segmented by Primary Underwriting Characteristic and would like to vary the rate increase by these characteristics to avoid adverse selection.

Using the segmentation template shown in class (second tab of the linked file) and the retention schedule (on the HO Data tab) show that if the 20% target rate increase is applied to all policies, the target loss ratio of 56% will not be achieved. (Assume that the development factor to take Total Incurred Losses at 12 months to ultimate can be applied to each segment.to estimate ultimate losses for each segment.)

Through trial and error, develop a recommended rate increase by segment that achieves the target loss ratio of 56%. Note the constraints of the retention schedule and the fact that the insurance department will not allow you to raise rates by more than 30% in a single year. (There is more than one solution.)

Sample Philadelphia Homeowners Data Retention Schedule Estimated Retention by Rate Change Range Original 5% Greater -4,9% -4.9 % 5%-10 % 15.1% 20% 10.1% to 15% Total Loss Ratio Discount or than 20 % Number of Policies 475 35% or Less 100% 80% 50% 30% 15% Incurred Losses at 12 mont S 129,925 40% 35% to 45% 100% 85% 65% 30% 20% Predicted Ultimate Losses $ 220,873 -Actuarial Estimate 70% 45% to 55% 100% 85% 70% 75% 30% 55% to 65% 100% 90% 85% 80% 75% 40% 332,500 Earned Premium after a year 65% to 75 % 80% 100% 95% 90% 85% 50% 75% to 85% 85% to 95% 100% 100% 100% 95% 85% 60% 100% 66% Ultimate Loss Ratio 100% 100% 100% 95% 70% want to get 66 down to 56 95% or More 100% 100% 100% 100% 100% 75% 56% Target Loss Ratiom (set by managemnet) 18% Target Rate Increase Segmentation by Primary Underwriting Characteristic (mutually exclusive categories) need to calculate loss ratios