it reflects
differences
in anticipated losses for classifications of risks with similar
anticipated expenses.
(3) A reasonable classification system is a system designed to group individuals or
risks with similar characteristics into rating classifications which are likely to identify
significant differences in mean anticipated losses or expenses, or both, between the
groups, as determined by sound actuarial principles and by actual and credible loss and
expense statistics or, in the case of new coverages or classifications, by reasonably
anticipated loss and expense experience.
(4) Sound actuarial principles shall include, but not be limited to, all of the following
principles:
(a) That data used in developing classifications and rates are derived from the
experience of a population or sample of risks that is sufficiently similar to the anticipated
insured population so that the statistics thereby obtained can reasonably be expected to
produce representative and reliable estimates of the anticipated loss and expense experience
for the insured population and so that such statistics are calculated in a manner that is
suitable to their intended use.
(b) That a reasonable predictive relationship can be demonstrated to exist between a
characteristic used in defining
a
rating classification and anticipated losses, anticipated
expenses, or the uncertainty of loss for the risks to which the classification applies.
(c) That if rates for individual rating cells are calculated by means of arithmetic
combinations of relativities for the classifications defining those cells, the relativities are
combined in a manner that equitably reflects the anticipated loss and expense experience
for those rating cells.
(d) That sampling techniques used in developing classifications and in estimating loss
and expense experience are suitable to their intended application.
(e) That with regard to private residential property insurance, rates for an insurance
coverage provided are established in a manner that can reasonably be anticipated to produce
loss ratios which are substantially uniform among the classifications, kinds, or types of
individuals or risks to which the rates apply. Evaluation of loss ratios shall make appropriate
adjustments for differences in deductibles and limits of liability among insureds, for expense
provisions which are not allocated to premiums on a percentage-of-premium basis, and for
differences in contingency factors among classifications and shall give due consideration to
the credibility of experience for groupings of individuals or risks, to trends in past and
prospective loss experience, and to historical patterns between projected and realized loss
ratios. For purposes of this subrule, "substantially uniform" means the absence of significant
variations among loss ratios.This subrule shall not be construed to prohibit the use of
appropriate pure premium relativities to estimate or evaluate rate relativities.
(5) Data of an insurer or rating organization used in calculating actual and credible loss
statistics shall be of sufficient volume, or shall be combined in an appropriate manner with
suitable data of sufficient volume, so that the statistics thereby calculated are reasonably
credible and can reasonably be anticipated to produce reliable estimates of anticipated loss
and expense experience.
(6) Data for reasonably anticipated experience used in calculating rates for new coverages
and in establishing new classifications shall, to the extent possible, be based on actual
experience for similar coverages and for groups of risks similar to the proposed classification
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