III. CONSIDERATIONS
A number of ratemaking methodologies have been established by precedent or common usage
within the actuarial profession. Since it is desirable to encourage experimentation and innovation
in ratemaking, the actuary need not be completely bound by these precedents. Regardless of the
ratemaking methodology utilized, the material assumptions should be documented and available
for disclosure. While no ratemaking methodology is appropriate in all cases, a number of
considerations commonly apply. Some of these considerations are listed below with summary
descriptions. These considerations are intended to provide a foundation for the development of
actuarial procedures and standards of practice.
Exposure Unit—The determination of an appropriate exposure unit or premium basis is
essential. It is desirable that the exposure unit vary with the hazard and be practical and
verifiable.
Data—Historical premium, exposure, loss and expense experience is usually the starting
point of ratemaking. This experience is relevant if it provides a basis for developing a reasonable
indication of the future. Other relevant data may supplement historical experience. These other
data may be external to the company or to the insurance industry and may indicate the general
direction of trends in insurance claim costs, claim frequencies, expenses and premiums.
Organization of Data—There are several acceptable methods of organizing data including
calendar year, accident year, report year and policy year. Each presents certain advantages and
disadvantages; but, if handled properly, each may be used to produce rates. Data availability,
clarity, simplicity, and the nature of the insurance coverage affect the choice.
Homogeneity—Ratemaking accuracy often is improved by subdividing experience into
groups exhibiting similar characteristics. For a heterogeneous product, consideration should be
given to segregating the experience into more homogeneous groupings. Additionally,
subdividing or combining the data so as to minimize the distorting effects of operational or
procedural changes should be fully explored.
Credibility—Credibility is a measure of the predictive value that the actuary attaches to a
particular body of data. Credibility is increased by making groupings more homogeneous or by
increasing the size of the group analyzed. A group should be large enough to be statistically
reliable. Obtaining homogeneous groupings requires refinement and partitioning of the data.
There is a point at which partitioning divides data into groups too small to provide credible
patterns. Each situation requires balancing homogeneity and the volume of data.
Loss Development—When incurred losses and loss adjustment expenses are estimated,
the development of each should be considered. The determination of the expected loss
development is subject to the principles set forth in the Casualty Actuarial Society’s Statement of
Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves.
(Rescinded by the Board of Directors of the CAS December 2020)
(Reinstated May 2021, for reference for U.S.-regulated ratemaking)