APPENDIX A Model Description The model description contains four sections. Two inputs to the simulation model is the standard deviation and serial correlation of the incurred benefit loss ratios. The first section describes how these two inputs are modified to remove the effect of management action in the data. The reason for this adjustment is that the model simulates management action when experience is emerging differently than expected. The surplus formulas describe how the model takes the model office input, loss ratio deviates and management action information and loops through the testing period to determine the ruin probability based on the initial required surplus amount. The loss ratio section describes how loss ratios are determined in the model based on the distribution of random deviates. The management action section describes how the model simulates premium rate changes based on changes in the loss ratios.
I.
Standard Deviation and Serial Correlation •
Calculate the standard deviation and serial correlation of the incurred claim
loss ratios for each of 51 companies over the years when data is available (1995 to 2001). •
Input parameters for ‘Management Action’ are: - starting target loss ratio (70%) - loss ratio annual increase % (vary by loss ratio class and premium size class) - high and low re-pricing incurred claim loss ratios - phase-in % for high & low - phase-in delay - 2001 premium
•
Change Due to Management Action: Start with actual loss ratio year 1, apply the re-pricing criteria, phase-in %, phase-in delay.
•
LR Trend: Multiply by the Annual Trend % to determine total next year’s
expected change in LR due to management action and trend. The Annual Trend % varies by premium class and loss ratio class.
43