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The Homeowner as the Risk
Becky Orsi, FCAS, MAAA
Allstate Insurance Company
2001 CAS Ratemaking Seminar
Las Vegas, Nevada -- March 13, 2001
Session: Emerging Issues in Homeowners
Insurance Ratemaking (PROP-40)
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Auto versus Homeowners
Ratemaking

Auto:
• Traditionally we think of the driver as the risk for
liability coverage and in some cases for
physical damage as well
• We insure the car, but rate on the driver

Homeowners:
• The house is the risk to be insured
• What if we view the homeowner as the risk
instead of the house?
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Possible New Homeowner
Rating Plans
Driver Profile
 Claims Rating
 Retired Discount

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Areas of Consideration for
New Rating Plans

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Objectivity
Causality
Practicality & Cost-Effectiveness
Data
Reclassification
Public Acceptability
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability


Driver Profile
Objectivity = specifically determinable
facts and not easily manipulated
How can this information be used in an
objective manner for homeowners
insurance?
• Example of external, non-insurance data

Consider how to handle insureds for
whom driver information is not available
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Driver Profile
Causality
• No need for cause-and-effect relationship
• Must use information that is reasonable
and not “obscure and irrelevant”

Practical Questions:
• Cost of obtaining driver profile information
• New and existing business
• Is communication to the customer needed?
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Driver Profile
Data:
• Is the source of the information reliable?
• If the customer disputes the information,
how will this be handled?

Reclassification
• Should external data be periodically reevaluated & the book re-classified?
• Actuarial question & practical question
• Possibly a regulatory issue
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Driver Profile
Public Acceptability
• Does the plan differentiate unfairly among
risks?
• Relevancy of external data for rating may
need to be addressed with the public
• Privacy issues
• Will a risk identify naturally with his/her
classification?
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Claims Rating
Objectivity = specifically determinable
facts and not easily manipulated
• To do this, a consistent definition of a
chargeable claim must be created
• Both new and existing customers should
be considered
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Claims Rating
Causality
• No need for a cause-and-effect relationship
• However, relationship of past claims to
future experience is reasonable and not
“obscure and irrelevant”
• Is the predictive relationship stronger for
some types of claims than others?
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Claims Rating
Is it practical to implement Claims
Rating?
• Implement retrospectively or prospectively
for existing business?
• Cost of obtaining claim data
• Multiple dwellings
• Whose claim history will be used?
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Claims Rating
Data Issues
• New business -- An outside data source for
claim history is needed
• Existing business -- There is a need to link
the rating algorithm with past claims history
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Claims Rating
Reclassification
• Claims will naturally “age out” of the
experience period
• How should a customer moving to a new
residence be handled?
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Claims Rating
Public Acceptability
• Does the plan differentiate unfairly among
risks?
• Relevancy of prior claim data may need to
be addressed
• Both issues are related to nature of
Homeowners claims
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Retired Discount
Objectivity
• Consider how age might be used in
defining “retired”
• Consider how employment may be used
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Retired Discount
Causality
• Is being retired “relevant” to Homeowners
risk classification?

Practicality/Data Issue
• How do you obtain age and retirement
status for existing book of business?
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•Objectivity
•Causality
•Practicality
•Data
•Reclassification
•Public Acceptability

Retired Discount
Reclassification
• How does “retired” status change?

Public Acceptability
• Fairness/Relevancy
• Privacy issues
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References

American Academy of Actuaries
• Risk Classification Statement of Principles

Actuarial Standards Board:
• Actuarial Standard of Practice #12:
“Concerning Risk Classification”
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