Transcript Download Handout 1

Casualty Actuarial Society
2008 Seminar on Ratemaking
Use of GLMs in Ratemaking
David Dahl, FCAS, MAAA
Casualty Actuary
Oregon Insurance Division
1
Overview
2

Main concern with models in Oregon is unfair
discrimination. By statute (ORS 746.015) this incorporates
three areas: rates, availability and terms and conditions.

Model review focuses on three aspects;
– Variable Selection
– Variable Support
– Selected Factors
Variable selection
Supporting information requested

Which variables were considered

The critical values used as guide in variable selection

How any demographic variables are verified and updated
Note - Legal prohibitions concern availability more than rating
3
Variable support
Information requested:
4

Relationship between modeled variables and cost
components (e.g. frequency, severity)
– graphs (lift curves), indicated relativities

Statistical validation
– Diagnostic test results such as p-values or confidence
intervals
Selected Factors
Information Requested

Method used to remove interaction between rating
variables
– generalized linear models techniques with a statement of
which variables were tested
– sensitivity testing when data is limited
5
Selected Factors (Cont’d)
Information Requested
6

Explanation of any selections that are significantly different
than their indications

How rate capping is handled
Other Oregon law about personal credit models
7

ORS 746.661(6) allows an insurer to use only factors other
than credit history or insurance score to re-rate a policy on
renewal.

OAR 836-080-0436 states applicants without a credit history
are considered a different rating group than applicants with
insufficient credit history to calculate an insurance score.

OAR 836-080-0438 requires an adverse decision notice be
given to any applicant who does not get the lowest rate
available.
Confidentiality and Trade Secret information
8

Insurance score models must be filed, ORS 746.662(1)

These models are confidential and not subject to public
disclosure, ORS 746.662(2)

The model rating factors are filed as public information,
ORS 737.205

Public information requests are evaluated by the Oregon
Attorney General, not the Insurance Division.
Confidentiality (cont’d)
Filing tip
9

Public access (confidentiality) for serff filings is determined
at the component level, not the pdf file or individual exhibit
level.

Confidential exhibits need to be in a separate component(s)
for proper of handling.
Other issues with rating models



10
External factors
Data sources
Selected factors
External Factors
Model variables can be affected by external factors

The preference for bank credit over non-bank revolving
credit may increase.
– Several businesses that market revolving credit, such as
department and specialty stores, are consolidating.
– Bank cards such as VISA and MasterCard are also issued
through non-financial businesses such as retailers.
11
External Factors (cont’d)
Model variables can be affected by external factors

There may be increased incentive to open new accounts.
– Credit issuers can sell their accounts
– Credit issuers can change the terms and conditions for
their existing account holders even when their account is
current.
12
Data Sources
Selection of appropriate data source may require more
judgment in the future.
13

Regional differences in credit underwriting (e.g. home loans)
may affect personal credit histories.

Differences in local economies may have a greater effect on
the relationship between personal information and claims.
Selected Factors
Rating models and selected factors may need to be
updated more often.
14

Average model score and the range (e.g. standard deviation)
of scores can change over time.

Regional or local effects on rating models and claim
likelihood may increase
Use of GLMs in Ratemaking
Questions?
15