Basic and Increased Limits Ratemaking: An Integrated Approach

Casualty actuaries commonly treat basic and increased limits ratemaking for liability insurance as two completely separate projects. Though this separation arises quite naturally, several inequities may arise from such an approach. This paper proposes a model that partially resolves from of these problems by deriving basic and increased limits rate indications simultaneously using a pure premium approach. The model takes into account the mean and standard deviation of the projected severity distribution, investment income, differences in loss and adjustment expense payment patterns by policy limit, fixed and variable expenses, and risk and profit loadings. The paper provides and an example of the model's use, in which the risk and profit component of the indicated rates is clearly shown. The paper also tests the model's sensitivity to changes in assumptions and suggest areas for further study.