Pricing the Catastrophe Exposure in Homeowner's Ratemaking

According to the Statement Of Principles Regarding Property And Casualty Insurance Ratemaking, consideration must be given to the impact catastrophes have on loss experience and procedures must be developed to include an allowance for the catastrophe exposure in the insurance rate. This paper offers an innovative approach to recognize Homeowners catastrophes potential. Current methods using long-term average ratios of (1) catastrophe to no-catastrophe and (2) excess wind to total less excess wind losses are discussed and compared to the proposed alternative. Based on a company’s historical catastrophe losses per earned exposures (as measured by Amount of Insurance Years) an d projected exposure levels, the method develops provisions which allow a company to be reasonably comfortable that the catastrophe exposure is adequately rated. Provisions are determined independently for the hurricane and non-hurricane catastrophe exposures. Reinsurance Research