Measurement of the Effect of Classification Factor Changes in Complex Rating Plans

Insurance companies strive to distinguish themselves from their competitors. One way of doing so is to refine the rating plan so that it more precisely estimates the appropriate rate for each risk. This refinement process adds complexity to the rating plan and in turn makes the measurement of changes to the individual components of the rating plan (the classifications) more difficult. In this paper, several different types of rating plans are analyzed. The rating plans range from simple plans, with either multiplicative or additive classifications factors, to more complex rating plans, with mixtures of each of these types of classification factors. Methods are developed for measuring the effect of changes to classification factors on the overall rate.