The actuarial memorandum in a rate filing

What the memorandum is for

State rating laws typically require that rates not be excessive, inadequate or unfairly discriminatory. The NAIC Product Filing Review Handbook describes these as the foundation for accepting, denying or adjusting a rate filing. The memorandum is the filer's case that the proposed rates meet those standards.

It is also an actuarial report. ASOP No. 41, Actuarial Communications, expects a report to state the findings and describe the methods, assumptions, procedures and data clearly enough that another qualified actuary could assess whether the work is reasonable. That is a useful test for any draft: could a regulator's actuary, starting from the memorandum alone, reproduce the path from data to selected rates?

Typical structure

There is no single required format, but most memoranda for a rate level and rating plan change cover the following, roughly in this order.

1. Summary of changes. Programs and companies affected, overall indicated and selected changes, proposed effective dates for new and renewal business, premium and policyholder counts affected, and the range of changes by policyholder.
2. Data. Source systems, experience period, how data is grouped (accident year, policy year or calendar year), whether it is direct or net of reinsurance, exclusions, and how it reconciles to statutory or statistical reporting.
3. Premium adjustments. Bringing historical premium to current rate level (by re-rating or the parallelogram method), and premium trend where the exposure base is inflation-sensitive.
4. Loss development. Triangles, age-to-age factors, the averages considered, selected factors and tail factors, and the reasoning for each selection.
5. Trend. Frequency, severity or pure premium trend, the fitted periods and data points, any external indices, and the trend period from the experience period to the average loss date under the proposed rates.
6. Catastrophe and large loss treatment. How cat and excess losses were removed from the experience and what provision replaces them, including any modeled losses.
7. Loss adjustment expense. Treatment of defense and cost containment and of adjusting and other expense.
8. Credibility. The credibility standard used, the weight given to the company's own indication, and the complement of credibility.
9. Expenses, profit and contingencies. Fixed and variable expense provisions, how they were derived, the profit and contingency provision, and how investment income is reflected.
10. Indication. The calculation of the overall indicated change.
11. Indicated versus selected. The selected change and the business reasons for any difference.
12. Rating plan changes and impact. Base rate and relativity changes, the support for each, the impact by rating variable, and the distribution of policyholder changes, including any capping or transition rules.
13. Reliance and limitations. Data or analyses provided by others, limitations, and the responsible actuary's identification.

For the overall rate level, the handbook illustrates the loss ratio method in textbook form:

• Target loss & LAE ratio = (1 - variable expense % - profit & contingencies %) / (1 + ratio of fixed expenses to losses)
• Indicated rate change = (projected loss & LAE ratio / target loss & LAE ratio) - 1

The pure premium method reaches the same answer from projected pure premium and fixed expense per exposure when data and assumptions are consistent.

Actuarial standards that apply

Memoranda often state that the work complies with the applicable Actuarial Standards of Practice. These are the ones most often engaged by a P&C rate filing.

ASOP No. 53 points to other standards for specific components: ASOP No. 13 for trend, ASOP No. 25 for credibility, ASOP No. 29 for expense provisions, ASOP No. 30 for profit and contingency provisions and the cost of capital, and ASOP No. 23 for data quality. Its background states that it incorporates the considerations in the CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking.

The CAS Statement of Principles was first published in 1988, rescinded by the CAS Board in 2020 and reinstated in 2021 as a reference for U.S.-regulated ratemaking. Its first principle, that a rate is an estimate of the expected value of future costs, is still commonly quoted in memoranda and in regulator correspondence.

ASOP No. 41 also requires disclosure when the actuary relies on assumptions set by law or by another party, and of the nature, rationale and effect of any material deviation from an applicable standard. Reviewers notice when a memo's compliance statement and its content disagree.

What reviewers check

Regulatory review varies by state and line, but rate reviewers commonly test:

• Reconciliation. Premium, losses and counts tie across exhibits and to the summary figures entered in SERFF.
• Trend support. The handbook notes that a small difference in trend can produce a large change in the projected costs over several years, so reviewers look at the fit, the data points excluded, catastrophe and seasonality adjustments, and law changes affecting frequency or severity.
• Development selections. Whether selected factors are consistent with the averages shown and whether tail factors are supported.
• Credibility and the complement. The handbook observes that credibility selection is often judgmental and that the filing should support both the weight and the reasonableness of the complement.
• Profit and investment income. Whether the profit provision accounts for investment income on reserves and is consistent with the cost of capital.
• Reinsurance cost. Whether net reinsurance cost is loaded into the rates; the handbook notes some states require direct data only.
• Indicated versus selected. Whether a selection that departs from the indication is explained.
• Rating factor changes. Whether relativities are actuarially supported and use permitted variables, and, for predictive models, whether the filing answers the questions in the NAIC white paper Regulatory Review of Predictive Models.
• Policyholder impact. The distribution of changes, the largest individual increases, and how capping or transition rules work.

Common weaknesses

• Selections stated without reasoning, such as "selected 4.0% severity trend" with no reference to the fits, external data or judgment behind it.
• Exhibits that do not tie to each other or to the overall change entered in the filing.
• An indication that changes methods from the prior filing without saying so or explaining why.
• Catastrophe or large-loss procedures that are described in one place and applied differently in the exhibits.
• Expense provisions supported by a single year, or fixed and variable expenses split without support.
• A selected change that differs from the indication with only a general reference to "competitive considerations."
• Relativity changes filed without the data or model output that supports them, or without the impact by variable.
• No disclosure of data or analyses relied on from others, such as catastrophe model output or advisory organization factors.

Most of these are cheaper to fix before submission than in an objection response. See what goes in a rate filing for the exhibits that sit behind the memorandum and SERFF objections for how reviewers raise these issues.