Risk-adjusted rate change monitoring
An internal, account-by-account measure of the change in price at constant risk from one renewal to the next, which Lloyd's requires of its syndicates and which corrects the illusion of an increase obtained merely by changing cover.
An underwriter renewing an account rarely compares two comparable prices: the limit, deductible, exclusions, the insured's exposure and inflation have all changed. Risk-adjusted rate change monitoring isolates the part of the premium change that reflects a genuine price change, neutralizing changes in cover and exposure. If the premium rises 15 percent but the deductible has been halved and the insured's revenue has grown 10 percent, the real price increase is much smaller, even negative. Lloyd's requires its syndicates to measure and report this change, because it is the first indicator of a portfolio's health during the year, long before losses emerge. The internal indicator differs from the indices published by brokers, which aggregate a market sample: it covers the underwriter's own portfolio and serves to steer its decisions. Its limit lies in the subjectivity of the adjustment: valuing an added exclusion or a raised deductible requires a model, and an underwriter under pressure may be tempted to overvalue tightened terms to show an increase.
Textbook case: a policy is renewed at 115,000 euros against 100,000. The insured's exposure has grown 8 percent and its deductible has been lowered, which the model values at 6 percent of premium. The risk-adjusted rate change is therefore only about 0.6 percent, not 15 percent.
rate monitoring, risk-adjusted rate change, RARC
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