Classification Ratemaking - Further Discussion

Classification ratemaking is one of the most important elements in the process of a property-casualty rate calculation. It is here that the pricing actuary moves from a rate change that is appropriate for an entire portfolio of policyholders, to prices that attempt to be fair and equitable for each policyholder in the portfolio. Classification ratemaking is so important that it has its own chapter in the textbook Foundations of Casualty Actuarial Science (Chapter 6, authored by R. Finger). Other sources of P&C study material also present lengthy analysis of this topic [e.g., Introduction to Ratemaking and Loss Reserving for Property and Casualty Insurance (2nd edition) by Brown and Gottlieb (2001)]. This paper illustrates that these two important references do not arrive at exactly the same results for a classification ratemaking situation where some cells have less than full credibility. The paper then goes on to attempt to isolate the reason for the differences, and in so doing, sheds new light on the process itself.