Transcript Download Handout 1

Predictive Modeling –
Potentials and Pitfalls
CAS Annual Meeting
November, 2006
John R. Pedrick, FCAS, MAAA
Ohio Department Of Insurance
www.ohioinsurance.gov
Predictive Modeling –
Pitfalls and Potentials
 Rate Regulation Basics – What’s the law?
 Regulatory Pitfalls
 The Future
What’s the Law?
Insurers must file everything.
“Every insurer shall file with the superintendent of
insurance every form of a policy, endorsement,
rider, manual of classifications, rules, and rates,
every rating plan, and every modification of any of
them which it proposes to use.”
- Ohio Revised Code § 3937.03 (A)
What’s the Law?
Insurers must support everything.
“When … the superintendent does not have
sufficient information to determine whether such
filing complies with sections 3937.01 to 3739.17 of
the Revised Code, he may require such insurer to
furnish the information upon which it supports
such filing.”
- Ohio Revised Code § 3937.03 (A)
What’s the Law?
Standards For Rates
“Rates shall not be excessive, inadequate,
or unfairly discriminatory.”
- Ohio Revised Code § 3937.02 (D)
What’s the Law?
Public Records
“A filing and any supporting information
shall be open to public inspection after the
filing becomes effective.”
- Ohio Revised Code § 3937.03 (A)
Regulatory Pitfalls
The Public Record
 Models are proprietary.
 Model results are incorporated in rating
plans.
 Rating plans are public records.
Regulatory Pitfalls –
Three Primary Questions
1. Are prohibited or controversial factors
used?
2. Can we rate a policy from information on
the record?
3. Are the rates actuarially sound?
Regulatory Pitfalls –
Controversial Factors May Need
More Support
For Example:
 Credit Score
 Education
 Occupation
Regulatory Pitfalls –
Prohibited Factors?
Characteristic:
Categories
Insurance Bureau Score:
A1 … A12
Ratio of Drivers to Vehicles:
B1 … B3
Number of Additional Policies:
C1 … C3
Number of Married Drivers:
D1 … D2
Years Policy in Force:
E1 ... E3
Vehicle Count:
F1 … F2
:
:
Regulatory Pitfalls –
Prohibited Factors?
Characteristic:
Categories
:
Age of Youngest Driver:
G1 … G8
Auto Losses ($) in Prior Term:
H1 … H3
Ratio of Incidents to Drivers:
I1 … I2
Frequency of Bill Payment:
J1 … J2
HO Losses ($) in Prior Term:
K1 … K3
43 Price Points (Tiers)
Regulatory Pitfalls –
Can A Policy Be Rated?
Regulatory Pitfalls –
Can A Policy Be Rated?
12 x 3 x 3 x 2 x 3 x 2 x 8 x 3 x 2 x 2 x 3
= 373,248 Combinations
At 21 Combinations per Page
17,774 Pages
Regulatory Pitfalls –
Can A Policy Be Rated?
17,774 Pages = 36 Reams
17,774 Pages, end-to-end,
stretch 16,293 feet.
That’s 3.1 miles of paper!
Regulatory Pitfalls –
Are Rates Actuarially Sound?
 Past
 Present / Recent Past
 Future
Regulatory Pitfalls –
Are Rates Actuarially Sound?
The Past
Loss Ratio Analysis
Territory
Credibility
Weighted Loss Ratio
Loss Ratio Relativity
Current
Territory
Relativity
Indicated
Territory
Relativity
A
66%
0.857
0.800
0.686
B
88%
1.143
1.100
1.257
Statewide
77%
1.000
1.000
1.000
Regulatory Pitfalls –
Are Rates Actuarially Sound?
The Present / Recent Past
Minimum Bias Analysis
Indicated Relativities
Territory
Class 1
Class 2
1.300
0.900
A
0.800
1.040
0.720
B
1.100
1.430
0.990
Regulatory Pitfalls –
Are Rates Actuarially Sound?
The Future
 x11
x
 12
Y   x13

 
 x1n
x21
x22
x23

x2 n
x31
x32
x33

x3n
 xm1   1    1 
 xm 2    2    2 
 xm 3     3     3 
    

    
xmn    m   m 
Regulatory Pitfalls –
Are Rates Actuarially Sound?
 Principles of Ratemaking
 Standards of Practice
ASOP 9 – Documentation and Disclosure
ASOP 12 – Risk Classification
ASOP 23 – Data Quality
Regulatory Pitfalls –
Are Rates Actuarially Sound?
 Regulators must adapt to new approaches.
 Actuaries must be prepared to explain their work
in understandable terms.
 Both must work to show the market benefits of
predictive models.
Predictive Modeling –
Pitfalls and Potentials
Contact Information:
John Pedrick
[email protected]
Ohio Department Of Insurance
www.ohioinsurance.gov