Monitoring Renewal Rate Change on Cat-Exposed Excess Property Business

This paper explains why a commonly-used metric of pricing performance, the Renewal Rate Change statistic, might not give true indications of the real rate change on Catastrophe (Cat)-Exposed Excess Property business. At the account level, false readings may arise when the renewal and expiring policies cover different layers or different sets of locations. When that happens, premium changes stemming from such differences are confounded with real changes in rate level. The paper presents a proposal to appropriately reflect coverage layer and location schedule differences. The proposal involves use of Cat Loss Simulation models to estimate the percentage by which the premium for an account should change in response to such differences. Once individual policy rate changes are correctly calculated, there is a potential problem in aggregating the individual results to a correct portfolio total. Concrete examples are presented to demonstrate that weighting with Renewal Premiums is incorrect and will lead to an overly optimistic answer. The paper then proposes alternative weights that lead to an unbiased result.

Keywords: Rate Monitor, Renewal Rate Change, Excess Property, Catastrophe Models