Actuarial Note on Loss Rating: An

Substantial underwriting losses in the mid- 1970’s are testimony to the inability of the insurance industry to deal effectively in the pricing process with some of the forces that affect its product. The problems are numerous; however, each of the problems can be subsumed under one of three categories. First of all, our inward looking ratemaking techniques did not equip us to cope with a changing economic environment. Our economic environment includes inflation, recession, a combination of the two, and an economy that is increasingly subject to shocks of various types. The second major problem is societal changes. Under this broad heading are changing attitudes about the level of risk one can (or should) bear. changing concepts of entitlement. and the erosion of tort law. The third problem area is unsound or inept ratemaking techniques. In this paper. unsound ratemaking practices are defined to include only the technically unsound aspects of ratemaking.