Transcript Businessowners (BOP) Class Plans 2004 CAS Ratemaking Seminar March 11, 2004

Businessowners (BOP)
Class Plans
2004 CAS Ratemaking Seminar
March 11, 2004
Robert J. Walling, FCAS, MAAA
Traditional BOP Rating Features
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Large, traditional territory definitions
Clustering of occupations
Clustering of fire protection classes
Simple approach to amount of insurance (AOI)
Significant U/W discretion (Schedule credits)
Bundled (composite) class rate
Businessowners Problems
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Market has disagreed on:
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Which classes to cluster/target
Construction relativities
Territory definitions
Occupancy factors (Malls, Single Occupancies,
Multiple Occupancies w/ Restaurants)
Lots of information gathered on application,
but not incorporated into rating
U/W Tiers & Schedule Credits
Overwhelm Manual Rating
BOP Relativity Differences
State X BOP Relativity Analysis
1.60
ISO Cnt
CO 1 Cnt
CO 2 Cnt
1.20
1.00
0.80
Construction/Protection
56
FR
14
FR
56
NC
M
NC
14
56
M
NC
14
NC
56
JM
14
JM
M
56
FR
M
14
0.60
FR
Relativity
1.40
How can credits be abused?
Company
Tiering
Factor
Schedule Percent of
Manual
Max/Min
Barbershop I.C.
1.25
+40%
175%
Barbershop I.C.
1.25
-40%
75%
Vanilla I.C.
1.00
+40%
140%
Vanilla I.C.
1.00
-40%
60%
BTA I.C.
0.85
+40%
119%
BTA I.C.
0.85
-40%
51%
TPet I.C.
0.70
+40%
98%
TPet I.C.
0.70
-40%
42%
THE
HIGHEST
NET RATE
IS OVER
FOUR
TIMES
THE
LOWEST!!
BOP Pricing Enhancements
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Revise class factors
Revise territories using zip codes
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May have impact similar to Homeowners on Protection
Create more sound AOI curve
Improve predictive accuracy of net pricing
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Reduce reliance on underwriting discretion
Add financial info and other insured characteristics
Add rating/tiering factors for application
information currently not rated
Approaches to Improving Net Pricing
Status quo
 Build a better underwriter
 “One and Done” tiering
 One way factors (e.g. “Mall Credit”)
 Multivariate U/W scoring systems
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How to Build a Better U/W
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Improve accuracy of manual rates by class
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Focus attention on larger risks and classes
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Especially for “flow” classes (office, book store, etc.)
Automation increases rating algorithm flexibility and
ease of implementing new rating factors
Has expense implications as well
Treat U/W and Agent as a pricing variable!
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Accentuate the positives!
Train, remediate, and reunderwrite the
negatives
BOP Agency Management Review
Percent of Manual
Program
50-74%
75-99%
100%
101-125%
> 125%
Contractors
123%
111%
84%
82%
68%
Habitational
104%
103%
107%
95%
93%
Office
96%
104%
102%
92%
109%
Restaurant
117%
113%
111%
114%
112%
Retail/Service
110%
101%
93%
95%
98%
Wholesale
80%
92%
90%
113%
122%
BOP Solutions –
Underwriting Scoring Systems
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Take data off the application that is not rated:
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Percent Occupied
Years in Business
Age of Building
Alarms
Computer Back Ups
Building Height
Swimming Pools
Safety Program
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•
•
•
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Elevators
Years of Same Mgt.
Updated Systems
Sole Occupancy
Hours of Operation
Deliveries?
Franchise?
# of Employees/Leasing
Out of schedule credits and into rating
Underwriting Scorecard Example
Underwriting Score Points - D&B Financial Assessment
Strength
5A
4A
3A
2A
1A
BA
BB
CB
CC
DC
DD
EE
FF
GG
HH
Composite Credit Appraisal
High
Good
Fair
Limited
250
250
200
150
250
250
200
150
250
250
200
150
250
200
150
100
250
200
150
100
250
200
150
100
250
200
150
100
200
200
150
100
200
200
150
100
200
150
100
50
200
150
100
50
200
150
100
50
200
150
100
50
200
150
100
50
200
150
100
50
Absence
250
200
150
100
Underwriting Scorecard Example
Years of
Current
Control
>10
6-10
0-5
Part Time/
Full Time
<33%
33% - 67%
>67%
Score
Points
150
75
0
Percent
Building
Occupied
>95%
65-95%
<65%
Score
Points
100
50
0
Score
Points
50
25
0
Safety
Program
Formal
Informal
None
Score
Points
50
25
0
Building < 25 Yrs Old
Central Alarm
No Parking Lot
Offsite EDP Backup
25 Pts
25 Pts
10 Pts
5 pts
Owner on Premises
Franchise
Closed by 9 pm
No Delivery
15 Pts
10 Pts
10 Pts
5 pts
Underwriting Scorecard Example
Cumulative
Point Range
0 - 99
100 - 199
200 - 299
300 - 399
400 - 499
500 - 599
600 - 700
Tiering
Factor
1.00
0.92
0.84
0.76
0.68
0.60
0.52
Problem with his Approach Interactions and Overlaps
1.80
1.70
1.60
1.51
1.40
1.32
Indicated Rate Differential
1.24
1.19
1.20
1.12
1.04
1.00
1.00
0.90
0.86
0.81
0.80
0.73
0.60
0.40
0.20
1
2
3
4
Level
5
6
Loss Ratio
GLM
Interactions Example
Pure Premium Relativity
Pure Premium Relativities by Program and
Years in Business
Contractors
Habitational
Office
Restaurant
Retail/Service
Wholesale
0-3
4-6
7-10
Years in Business
10+
Underwriting Scorecards
Reflecting Interactions

Multivariate analysis allows the modeling of interactions
and modern policy management systems facilitate the
implementation of more complex tiering systems
Years of
Current
Control
0-3
4-6
7-10
10+
Score Points
Contr.
60
100
120
150
Habit.
115
130
135
150
Off.
120
125
135
150
Rest. Ret./Serv. Wholes.
70
95
100
85
100
110
100
120
125
150
150
150
Parting Thoughts
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Where there is no vision, the people perish.
–
Proverbs 29:18
The data’s ready,
The technology’s ready,
ARE YOU READY???