For property insurance (hurricanes, wildfires), the expected annual loss is low, but the severity is extreme. Using a pure 3-year average might miss a 1-in-100-year event. Therefore, ratemaking for catastrophes uses (e.g., RMS, AIR) to simulate hundreds of thousands of years of hurricanes and derive a probable maximum loss (PML) , which is then loaded into the rate.
For volatile lines (hurricane, earthquake), historical average losses are insufficient. Insurers incorporate: 36 (Reserves) | Compares the projected loss ratio
| Aspect | Ratemaking | Loss Reserving | |--------|------------|----------------| | | Before policy effective date | After policy effective date | | Uncertainty | Future events (unknown losses) | Past events (partially known) | | Data | Historical + prospective | Historical development | | Regulatory focus | Rate adequacy, discrimination | Solvency, timely payment | | Actuarial standard | ASOP No. 12 (P&C Pricing) | ASOP No. 36 (Reserves) | For volatile lines (hurricane
Compares the projected loss ratio to the permissible loss ratio. discrimination | Solvency
For accident year 2023, after 12 months you’ve paid $100. Historical factor from 12 to 24 months is 1.20. Estimated paid at 24 months = $120. Continue until the loss is fully developed.
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