Geographic Rating of Individual Risk Transfer Costs without Territorial Boundaries

This paper describes a geographic ratemaking procedure that does not require territories or territory boundaries. The procedure develops a unique rate for every point on the map. The result can be visualized as a smooth surface over a map, with the height of the surface at any point representing the rate for that point. Abrupt changes in rates such as those which occur at territory boundaries are eliminated, though “natural boundaries” can be provided on an exception basis. The procedure described uses massive computing power (as available on personal computers), and geo-coded loss data. Policy rating requires use of a personal computer, and geographic software to determine latitude/longitude for a risk. The paper discusses credibility and data-weighting concepts, and determination of the effect of a rate change. It also compares the traditional territorial ratemaking model to the proposed method in the context of a generalized model for determining rates for individual locations. An example of the described method is provided based on an adaptation of zip code data