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The Indication Is That Your Final Answer?
CAS Ratemaking Seminar
March 10, 2005
INT-3
Introductory Session 3
Betsy DePaolo
Travelers Property Casualty
Guo Harrison
Medical Mutual Liability
Insurance Society of Maryland
2
Overview
Interpreting the Indication
 Marketplace
 Expected Reactions
 Alternatives to Rate
 Testing the Action
 Commercial vs. Personal Lines

3
Interpreting the Indication

Data Anomalies




Unusual Loss Activities
Weather Effects, etc.
Changes in Statutes
Changes in Company Practices




Underwriting Guidelines
Claims Handling
Distributional Changes
Planned Changes
4
Why it’s not “The Final Answer”

Indicated Change is Negative
 May
lead to profit problems
 Don’t need to drop rates that much

Indicated Change is very Positive
 Will
lose customers
 Adverse Selection
 Regulators won’t allow
5
Marketplace
Underwriting Cycle
 Competitive Position
 Competitors Actions – Recent and Projected
 Competitor Considerations

6
Competitive Position
Various measures of competitiveness
 Percentage of Competitor rates

 Single
Competitor
 Average of Group of Competitors

Win Rate
 Percentage
of cases when you have best rate, or
within $X of best rate
 Consider both $ and % differences
7
Competitive Position
Sample Policy #1
Married Couple
Ages 50 and 51
No Incidents or Accidents
1996 Honda Accord
2001 Lincoln Town Car
Sample Policy #3
Single Female
Age 22
Speeding Ticket
2004 Chevrolet Camaro
Sample Policy #5
Single Female
Age 40
No Incidents
1995 Toyota Camry
Sample Policy #2
Married Couple
Ages 27 and 28
No Incidents or Accidents
2003 Honda CRV
1999 Ford Escort
Sample Policy #4
Single Male
Age 70
At Fault Accident
1985 Pontiac Bonneville
Sample Policy #6
Family
Ages 48, 47, 16
No Incidents
2001 Infiniti I30
2000 Subaru Forester
1995 Honda Civic
8
Competitive Position
Policy Premiums
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Sample Policy 1
1,800
1,810
1,830
1,815
1,808
1,823
1,819
1,812
1,860
1,821
Sample Policy 2
1,900
1,960
2,020
1,915
2,015
1,978
1,991
1,904
1,960
1,940
Sample Policy 3
2,700
2,575
2,400
2,531
2,605
2,573
2,463
2,575
2,525
2,519
Sample Policy 4
1,110
1,123
1,094
1,096
1,166
1,101
1,134
1,087
1,101
1,105
Sample Policy 5
1,025
1,040
1,010
1,020
1,040
1,030
1,045
1,035
1,025
1,018
Sample Policy 6
3,350
3,425
3,150
3,550
3,475
3,875
3,413
3,275
3,375
3,450
9
Competitive Position
Win Ratios (# of times company price is lowest)
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Sample Policy 1
1,800
1,810
1,830
1,815
1,808
1,823
1,819
1,812
1,860
1,821
Sample Policy 2
1,900
1,960
2,020
1,915
2,015
1,978
1,991
1,904
1,960
1,940
Sample Policy 3
2,700
2,575
2,400
2,531
2,605
2,573
2,463
2,575
2,525
2,519
Sample Policy 4
1,110
1,123
1,094
1,096
1,166
1,101
1,134
1,087
1,101
1,105
Sample Policy 5
1,025
1,040
1,010
1,020
1,040
1,030
1,045
1,035
1,025
1,018
Sample Policy 6
3,350
3,425
3,150
3,550
3,475
3,875
3,413
3,275
3,375
3,450
Win Ratio
33.3%
0.0%
50.0%
0.0%
0.0%
0.0%
0.0%
16.7%
0.0%
0.0%
10
Competitive Position
Percentage Differences in Policy Premiums
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Sample Policy 1
0%
1%
2%
1%
0%
1%
1%
1%
3%
1%
Sample Policy 2
0%
3%
6%
1%
6%
4%
5%
0%
3%
2%
Sample Policy 3
0%
-5%
-11%
-6%
-4%
-5%
-9%
-5%
-6%
-7%
Sample Policy 4
0%
1%
-1%
-1%
5%
-1%
2%
-2%
-1%
0%
Sample Policy 5
0%
1%
-1%
0%
1%
0%
2%
1%
0%
-1%
Sample Policy 6
0%
2%
-6%
6%
4%
16%
2%
-2%
1%
3%
11
Competitive Position
Dollar Differences in Policy Premiums
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Sample Policy 1
0
10
30
15
8
23
19
12
60
21
Sample Policy 2
0
60
120
15
115
78
91
4
60
40
Sample Policy 3
0
-125
-300
-169
-95
-128
-238
-125
-175
-181
Sample Policy 4
0
13
-16
-14
56
-9
24
-23
-9
-5
Sample Policy 5
0
15
-15
-5
15
5
20
10
0
-7
Sample Policy 6
0
75
-200
200
125
525
62
-75
25
100
12
Competitor Actions

Recent Changes –
 Not
reflected in competitive position
 Reflected in competitive position

Indicative of future changes
13
Competitor Considerations
Financial Strength
 Customer Service
 Claim Service
 Ease of Doing Business
 Commission Levels

14
Expected Reactions

Policyholder
 Retention
 New
Business
Agents
 Regulators

 Recent Approvals

Shareholders
15
Expected Reactions
Rate Change Histogram – Dollar Changes
Over $750
Dollar Changes
$501 to $750
$251 to $500
$201 to $250
$151 to $200
$101 to $150
$51 to $100
$1 to $50
-$50 to $0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Policies
16
Expected Reactions
Percentage Change
Rate Change Histogram – Percentage Changes
56% to 60%
51% to 55%
46% to 50%
41% to 45%
36% to 40%
31% to 35%
26% to 30%
21% to 25%
16% to 20%
11% to 15%
6% to 10%
1% to 5%
-10% to 0%
0
5,000
10,000
15,000
20,000
Policies
17
Alternatives to Rate
Revenue Indication, not Rate Indication
 Expense Actions
 Underwriting Guidelines
 Marketing Plans

18
Testing The Plan
Intuitive Evaluation
 Elasticity of Demand around similar
changes
 Feedback from Agents
 Scenario Modeling

19
Scenario Modeling
Territory Premium
A
500
B
500
Total
1000
Loss
Ratio
48.0
72.0
60.0
20
Scenario Modeling
Rate
Territory Premium Change
A
500
-10%
B
500
10%
Total
1000
0%
21
Scenario Modeling
Territory
A
B
Total
Projected
Premium
450
550
1000
Loss
Ratio
53.3
65.5
60.0
22
Scenario Modeling
Expected
Territory Retention
A
95%
B
60%
Total
Projected Rate
Premium Change
475
-10%
300
10%
775
-2.3%
23
Scenario Modeling
Territory
A
B
Total
Projected
Premium
428
330
758
Loss
Ratio
53.3
65.5
58.6
24
Conclusions
Four major considerations
 Profitability
 Competition
 Disruption
 Retention
25