Overall Level of Home Insurance Rates

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1 Overall Level of Home Insurance Rates University of Waterloo Actuarial Projects Competition Michael Vezina & Frédérick Guillot, Co-operators February 12 th, 2015

2 Agenda Who are we? Case Study Details? Q & A

3 The Co-operators - MISSION Financial security for Canadians and their communities

4 Co-operators in 5 points Established in 1945 by Saskatchewan wheat farmers 100% Canadian-owned co-operative 42 members: co-operatives, credit union, etc. Provide full range of insurance and financial services More than $37 billion in assets under management

5 Insurance Protection for Canadians Property & Casualty Insurance 847,000 homes 1.3 million vehicles 41,000 farms 120,000 businesses Life Insurance 665,000 lives 267,000 employees group benefits 965,000 Canadian travellers and visitors to Canada 1 million Canadians creditor insurance

6 Case Study: Objective Assess the profitability of the Alberta Homeowners book of business, for policies written through January 1 st, 2017 and December 31 st, We are looking for a percentage increase/decrease to current premium levels in order to properly cover for future expected losses and expenses.

7 Pricing Guiding Principles A rate is an estimate of the expected value of future costs A rate provides for all costs associated with the transfer of risk A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer

8 Assumptions Most of the work with the case study is to bring Premiums and Losses to a common level (apples-toapples comparison), which is the period the rates are to be effective (i.e. Jan. 1st, 2017) Premium on-leveling: Experience Period Prospective Period Average Premiums: $ 1,000 $ 1,000 $ 1,050 $ 1,050 $ 1,260 $ 1,260 +5% +10%

9 Assumptions Claims development: Accident ultimate Jan. 1, 2010 $ 1000 $ 1250 $ 1260 $ 1265 Jan. 1, 2013 $ 5000 $ 7500?? Jan. 1, 2014 $ 2500??? When calculating the indication, losses in the experience period must be at ultimate Separate data has been provided to calculate the LDF Factors Loss development for homeowner insurance is not as significant as in other lines (ex.: auto insurance)

10 Assumptions Trends: The past is indicative of future experience Use your stats knowledge to analyze & interpret the data! Use judgement to select your trends. Don t let the formulas do all the talking. Separate your trend selections between retrospective ( explaining the past ) and prospective ( explaining the future ) Loss trends should be analyzed separately between frequency and severity

11 Assumptions Catastrophes Infrequent, unreliable events that have the potential to disrupt all of the calculations to produce the indication Considerations must be made on whether to exclude part or even the entire event to avoid disrupting the indications. Example, should losses be capped above a certain amount? Statistical Techniques must be developed (like geo-spatial analysis) to understand and quantify catastrophic events BONUS CASE STUDY

12 Two Approaches Loss Ratio Method Compares the historical loss ratio to a Permissible Loss Ratio (PLR = 1 expenses) Premiums and losses must be adjusted Pure Premium Method Compare the historical loss cost to theoretical loss cost (see article for formulas) Does not use premium, but exposure counts instead There are advantages and disadvantages to both methods

13 Data Provided Aggregated premiums and losses from our historical period ( ) for Alberta Homeowners Losses are separated by peril, premiums are not The FSA is provided for analysis Loss development data is provided to calculate LDFs List of historical premium rate changes Expense Ratios

14 Final Output Candidate must provide the factors (increase or decrease) to be applied to current premiums Candidate must demonstrate a clear understanding of the assumptions and calculations that went into the study Candidate must provide the calculations in an easyto-follow format

15 Details about the Competition Interested candidates should submit their final deliverables by noon on March 9 th, 2015 Submissions have to be done online on via the appropriate form on the following website: Teams selected for the final presentation will be contacted Co-operators will grant a $1,500 to the winning team

16 Questions

17 Contacts

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