Purpose
Convert raw premium, loss, expense, and investment income figures into the core profitability ratios and an indicated rate need — then classify the book into a pricing adequacy band and issue a specific rate action recommendation. Replaces manual spreadsheet ratio work and gives underwriters a defensible, repeatable adequacy verdict for any line of business.
When to Use
Invoke this skill when the user asks to:
- Calculate the combined ratio, operating ratio, or indicated rate need for a book
- Determine whether current pricing on a line is adequate or inadequate
- Diagnose why a line of business is unprofitable and by how much
- Quantify the rate change needed to hit a target combined ratio or return
- Prepare the actuarial rationale supporting a rate filing or renewal decision
- Compare pricing adequacy across multiple lines, segments, or accident years
Inputs Required
Before starting, collect:
- Line of business: The specific line or segment being reviewed (e.g., commercial auto, homeowners, workers' comp)
- Earned premium: Earned (or written, if specified) premium for the period, in dollars
- Incurred losses: Losses including LAE — specify whether ALAE and ULAE are included
- Underwriting expenses: Acquisition, general, and other underwriting expenses (dollars or expense ratio %)
- Investment income: Investment income attributable to the line, or a policyholder-supplied yield to apply to reserves
- Target combined ratio or target return: The profitability threshold the book must meet
- Loss trend and premium trend (optional): Annualized trend factors to project losses forward to the rating period
If ALAE/ULAE handling, trend factors, or an investment yield are not provided, apply industry-neutral defaults (losses reported gross of ULAE, no trend applied, investment income excluded from operating ratio) and state each assumption explicitly at the top of the output.
Instructions
Step 1: Confirm and Normalize Inputs
Restate every input in a labeled input summary. Convert any percentages to dollars (or dollars to ratios) as needed so all figures are on a consistent basis. Note the accident/policy period and whether figures are earned or written. Flag any input that appears internally inconsistent (e.g., losses exceeding premium by an implausible margin, or expense ratio outside 15–40%).
Step 2: Compute Core Ratios
Calculate and show the arithmetic for each:
- Loss Ratio = Incurred Losses ÷ Earned Premium
- Expense Ratio = Underwriting Expenses ÷ Earned Premium (state whether on earned or written basis)
- Combined Ratio = Loss Ratio + Expense Ratio
- Operating Ratio = Combined Ratio − (Investment Income ÷ Earned Premium)
Present each as a percentage to one decimal place. State the underwriting profit/loss margin as (100% − Combined Ratio).
Step 3: Apply Trend (if trend factors provided)
Project losses and premium to the midpoint of the proposed rating period:
- Trended Loss Ratio = Loss Ratio × (1 + loss trend)^n ÷ (1 + premium trend)^n, where n is the trend period in years
- Recompute the trended combined ratio using the trended loss ratio
- Show both untrended and trended results side by side
Step 4: Compute Indicated Rate Need
Use the standard indication formula:
- Indicated Rate Change = (Trended Combined Ratio ÷ Target Combined Ratio) − 1
Where the target combined ratio reflects the permissible loss + expense + profit provision. If a target return is supplied instead of a target combined ratio, back into the permissible combined ratio: Permissible CR = 100% − target profit provision. Express the indicated rate change as a signed percentage (e.g., +8.4% indicated increase, −3.1% indicated decrease).
Step 5: Classify the Pricing Adequacy Band
Assign the book to one band based on the combined ratio (use operating ratio where investment income is material and supplied):
- Adequate — Combined ratio at or below target. No rate action required; monitor.
- Marginally Inadequate — Combined ratio 0–5 points above target. Rate correction warranted; profit thin but not eroding capital.
- Inadequate — Combined ratio 5–15 points above target. Meaningful underpricing; rate action needed near-term.
- Severely Inadequate — Combined ratio more than 15 points above target, or combined ratio above 110%. Book is destroying value; requires rate action plus underwriting or mix intervention.
State the band, the exact point-gap to target, and whether investment income changes the verdict.
Step 6: Issue Rate Action Recommendation
Deliver a specific, defensible recommendation:
- The indicated rate change and whether to take it fully, partially (with a phase-in path), or hold
- One caveat on credibility if premium volume is thin (small books support less rate confidence)
- Whether the driver is loss ratio, expense ratio, or trend — and what secondary action (mix shift, expense reduction, underwriting tightening) supports the rate move
- Be opinionated: name the recommended rate change, do not hedge to a range
Output Format
- Structure: Input summary → ratio calculations with shown arithmetic → trended results (if applicable) → indicated rate need → adequacy band → rate action recommendation
- Length: 500–800 words
- Format: Structured document with a labeled results table for the ratios; prose for the diagnosis and recommendation
- Sections: Input Summary & Assumptions → Core Ratios (table) → Trended Results (if trends provided) → Indicated Rate Need → Pricing Adequacy Band → Rate Action Recommendation
- Tone: Actuarial and precise — numbers-first, defensible, filing-ready; no hype
Quality Checklist
Before delivering output, verify:
- [ ] Every ratio shows its formula and the numbers plugged in — not just the result
- [ ] Combined ratio equals loss ratio plus expense ratio (arithmetic reconciles)
- [ ] Operating ratio correctly subtracts the investment income ratio from combined ratio
- [ ] Indicated rate change is signed (+/−) and derived from the target/permissible combined ratio
- [ ] The adequacy band matches the computed point-gap to target (band boundaries applied correctly)
- [ ] Every default assumption (ULAE handling, trend, investment income) is stated when the input was missing
Notes
- Combined ratio measures underwriting alone; operating ratio tells the fuller economic story — always report both when investment income is supplied, since a book can run combined above 100% yet still be economically adequate.
- Thin books carry low credibility: an indicated +20% on $200K of premium is far less actionable than +6% on $20M. Flag credibility explicitly rather than letting the raw indication drive the recommendation.
- The indicated rate is the technical answer; the recommended rate accounts for competitive position, regulatory filing constraints, and phase-in tolerance — keep the two distinct in the output.
How to use this skill
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Installing in Claude Code:
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Using in Claude.ai, ChatGPT, Gemini, or other AI tools:
- Drag this file into a new chat, or copy and paste its contents
- Send your task or request as your next message — the AI will apply the skill where it fits
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