no change to aggregate premium
Some clarification on "new rating variables alone cannot increase agg premium". If a new rating variable came to be (that regulators had no issue with the usage of) and it's significant and it's representative of risk wouldn't it change aggregate premium? I know its common for companies to off balance so that theres a 0% change in agg premium but im still not really following why a rating variable can't change agg prem.
Comments
The battle card (2017 Fall c.i) in question states that "a new rating variable alone should not increase aggregate premium".
If an insurance company with 100 policyholders is already charging an average premium of $1,000, then their aggregate premium will be $100,000. If a new rating variable is introduced that is representative of risk, that should only help improve the segmentation of risks in the book, and usually wouldn't impact the average premium. We might be able to better distinguish which risks to charge $800, which to charge $1200, etc. but the average premium will still be offset to $1,000 pending any regulatory intervention or concerns about profitability & inflation.
It is possible for the introduction of a new rating variable to increase aggregate premium, like if a surcharge (e.g. 10% surcharge on drivers > 40) is introduced for a segment of the book without the insurer offsetting rates. However, insurers typically offset rates so that the total premium collected remains unchanged. This ensures that introducing new variables does not inadvertently increase or decrease total revenue.