The Balancing of Ratemaking Assumptions and Annual Financial Planning Assumptions

When an elaborate operational and financial plan is prepared for the following year, including assumptions regarding prospective rate changes, goals are made with regard to premium levels and profitability. If certain assumptions such as catastrophe loads, loss trends and the effects of variability are not explicitly linked to the assumptions used for ratemaking on the product and state level, a built-in bias may be created for either rate inadequacy or rate redundancy that does not deliver the results as shown in a financial plan for a business segment. The goal of this paper is to show some of the pitfalls and provide basic ideas for balancing the ongoing ratemaking effort to the annual financial plan. This is particularly important in the current environment of changing catastrophe expectations and the increasing involvement of actuaries in financial planning.