HOMEOWNERS BY-PERIL RATING PLAN

Transcription

1 HOMEOWNERS BY-PERIL RATING PLAN

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3 Homeowners By-Peril Rating Plan Your Plan to Compete... Homeowners insurers are under intense pressure to rate policies more precisely. With more carriers utilizing refined rating plans, no carrier can afford to cling to traditional rating methods. Insurers today must systematically identify and re-price policies that are mispriced for the level of risk they pose. New generation rating plans give insurers the means to price with greater granularity, meaning that risks will be rated more and more on the basis of their individual characteristics and exposures, and less and less on the basis of generalized experience. Accounts that are overpriced will be poached by competitors using sophisticated pricing plans to identify such opportunities. Accounts that are underpriced will remain with or gravitate toward companies who are inviting adverse selection by postponing use of a refined rating plan. AAIS responded to this challenge facing companies by filing the first by-peril rating plan developed by a bureau for rating homeowners insurance policies. The AAIS Homeowners By-Peril Rating Plan is the product of a multi-year, multimillion dollar investment to acquire data and sophisticated statistical tools, and to apply the actuarial expertise needed to implement this industry-leading plan. The AAIS Homeowners By-Peril Rating Plan is a smart plan that provides the precision of a highly refined rating plan while being relatively simple to implement, augment, and automate. All information contained herein is copyright protected and is being provided solely for evaluation purposes. Program material and concepts cannot be used in whole or in part without an AAIS affiliation. Please do not copy, reproduce or in any way provide these materials to any third parties.

4 Rating Each Risk The AAIS Homeowners By-Peril Rating Plan rates homeowners policies on the basis of 10 causes of loss: five catastrophe perils, four non-catastrophe perils, and one peril for liability and medical payments. In place of rating tiers that apply an average loss cost to various risks in a category, the plan allows carriers to rate each risk according to the unique combination and magnitude of hazards affecting it. The structure of the AAIS Homeowners By-Peril Rating Plan is the same in all states, but different perils have been selected in each state to reflect its loss exposures. For example, in California, brush fire is included as a peril in place of hurricane. The AAIS plan uses a common rating algorithm for all perils, making it easy to incorporate the plan into company systems. Filed on an advisory basis, the Homeowners By-Peril Rating Plan Manual consists of a multistate rules manual, rating information, and state exception pages. Under the plan: Base loss costs are shown separately for each zone (usually defined at the county level) and separately for each of the 10 distinct perils. Those zone base loss costs are further refined to the ZIP Code level with peril-specific factors. The plan includes tables with a full complement of factors used to adjust base loss costs for each rating variable and coverage options offered by a comprehensive homeowners program. These include amount of insurance, fire protection, construction, deductibles, and many others, including some new ones, such as the presence of dogs, swimming pools, or trampolines. The plan also features many deductible options, with losses caused by wind or hail always subject to a percentage deductible ranging from 0.1% to 25%. This range was developed to address differences in risks and exposure between seacoast and inland locations. The flat deductible options for the non-wind causes of loss range from $100 to $25,000 per occurrence; the corresponding rating factors vary by the amount of insurance, a true multi-variate approach. Rating Variable Inventory (Sample) Type Variable Operation Location Zone Base Loss Cost Dollar Amount Location Subzone Relativities Multiplicative The algorithm for the AAIS Homeowners By-Peril Rating Plan accounts for the impact on each peril of more than 30 rating variables and coverage options. Type Variable Operation Coverage AOI Relativities Multiplicative Coverage Form Relativities Multiplicative Coverage Non W/H DED Relativities Multiplicative Type Variable Operation Property Construction Relativities Multiplicative Property Cladding Relativities Multiplicative Property Roof Covering Relativities Multiplicative

5 Data Sets The plan s rating information is available as a data set in two formats: Microsoft Excel workbooks, which include documentation describing the content of the tables provided; and XML, the extensible markup language used to structure data according to common standards so data can be exchanged among multiple systems. Of particular value to companies that use the Homeowners By-Peril Rating Plan are the additional Microsoft Excel workbooks developed to help a company create its own manual pages. For each state, two workbooks are provided: One allows a company to test the application of loss cost multipliers, either as a single multiplier for the entire state or several multipliers that can vary by zone and/or peril; and Another includes rating zone assignments, relativity factors, and loss costs for mandatory and optional coverages. Companies can use the workbook to change rating zone assignments and/or modify the corresponding rating factors and loss costs. NOTE: Most states require that companies file their loss cost multipliers as well as any companyspecific deviations from the rating plan included in the AAIS filing. XML Microsoft Excel Rating information provided in the AAIS Homeowners By-Peril Rating Plan is available in XML format for incorporation into company systems and in spreadsheet format for users to view and modify, if desired (under regulatory requirements, where applicable).

6 Analysis The AAIS Homeowners By-Peril Rating Plan is backed by critical ongoing maintenance by AAIS actuarial, product development, and compliance staff. Working together, this team incorporates new data and developments in catastrophe modeling, tests new rating variables, refines manual rules, and maintains the plan in compliance with various state requirements. Anton Zalesky Chief Actuary Jeff Holaway Pricing Manager To identify and refine rating factors for each of the 10 causes of loss, AAIS actuaries analyzed more than 100 different geographic, demographic, weather, and crime variables to evaluate and select those that have a significant correlation to loss. For example, AAIS actuaries determined that age of home and systems credits would be utilized more precisely if applied to individual perils, rather than to the entire policy premium. Peril Relativities Windstorm Deductibles (Sample) Ded. % Peril A Peril B Peril C Peril D Peril E Peril F Peril G Peril H Peril I Peril J 1.5% % % % % % % % Perils impacted by each rating variable Perils not impacted by each rating variable A defining value of the AAIS Homeowners By-Peril Rating Plan is the fact that it applies rating factors for coverage options (in this case, windstorm deductible options) only to those perils affected by a variable or option. This makes for more precise pricing of policies.

7 Amount of Insurance Relativity By-peril rating is not only a function of exposure to territorially-based hazards, but reflects relative exposure to partial or total losses by different perils under different amounts of insurance. LIABILITY CONSTRUCTION AOI Limit Peril A Peril B Peril C Peril D Peril E Peril F Peril G Peril H Peril I Peril J Limit Peril A Peril B Peril C Peril D Peril E Peril F Peril G Peril H Peril I Peril J Limit$90,000 Peril A Peril B Peril C Peril D Peril E Peril F Peril G Peril H Peril I Peril J ,000 90,000$95, , ,000 $100, , ,000 $110, , ,000 $120, , ,000 $130, , ,000 $140, , ,000 $150, , ,000 $160, , ,000 $170, , ,000 $180, , ,000 $190, , ,000 $200, , ,000 $210, , ,000 $220, , ,000 This table shows how loss cost relativities for different amounts of insurance differ for different perils as you diverge from a base Coverage A limit of $220,000.

8 Benefits Beyond Rating Beyond its value for rating policies, the AAIS Homeowners By-Peril Rating Plan can serve as a tool to establish underwriting guidelines, marketing objectives, and reinsurance needs with precision. The information available through the plan will allow companies to readily determine where their current risks are concentrated and the perils to which they are most exposed. With this information, carriers can adjust their marketing strategies to improve their spread of risk and implement loss control measures or use of certain endorsements to control their loss ratios. The AAIS Homeowners By-Peril Rating Plan can serve as a tool to establish underwriting guidelines, marketing objectives, and reinsurance needs with precision. Similarly, the modeled catastrophe data incorporated into the plan will help users identify the nature and extent of their catastrophe exposure, allowing them to make more informed, data-based decisions when purchasing reinsurance. Transition Support AAIS is prepared to help companies manage a range of strategic and operational issues that arise once a company decides to transition to any new rating plan. Most importantly, the introduction of a new rating plan can and should cause premium dislocation in a book of business previously rated under a different plan. The dislocation can be even greater when transitioning from traditional composite rating to a refined by-peril plan. To help companies address the challenges of converting to a new rating plan, AAIS is developing an implementation support package, which includes: Analyzing and segmenting a company s current book of business to identify rating deficiencies; Helping carriers identify their preferred solution configuration; Embedding carrier-specific rating components into the plan (e.g., credit scoring); Identifying severe rate dislocations and developing transition rules; Addressing IT needs, including rating engine support; and Supporting required filing activities Also, AAIS actuarial support will be available to companies that seek to modify rating factors, develop caps on premium changes, or otherwise adjust the plan.

9 Resources The AAIS Homeowners By-Peril Rating Plan is the product of a unique combination of resources assembled by AAIS. 1. Statistical Data As a licensed statistical agent, AAIS has a history of aggregating and synthesizing large volumes of data, taking it from raw form and transforming it into information that supports rating and passes regulatory review. AAIS s database of several billion dollars in homeowners premium and loss records provides the foundation for the highly refined and actuarially credible loss costs and relativity factors included in the AAIS Homeowners By-Peril Rating Plan. To supplement its traditional insurance statistical data, AAIS has acquired large volumes of additional geographic, demographic, crime, and weather data from public and private sources. 2. Actuarial Expertise The AAIS actuarial team consists of a group of dedicated professionals with several years of experience in advisory organization ratemaking as well as pricing work for prominent insurance companies. AAIS is one of only two P/C rating bureaus operating nationwide. Our team includes credentialed actuaries and actuarial analysts with a high level of expertise in pricing, predictive modeling, building innovative classification plans, and consulting with AAIS affiliates on the maintenance of their rating information and adoption of AAIS programs. For the by-peril rating plan, AAIS staff actuaries have done the multivariate analysis needed to determine, among scores of potential variables, which ones are predictive of loss, which are not correlated with loss, and which duplicate the effect of other variables, and should not be included. 3. Analytical Tools AAIS has licensed catastrophe modeling applications developed by leading developers of cat models. Behind these applications is even more data on structures, climatic conditions, land use, and other factors that impact catastrophe exposure. AAIS actuaries use advanced data analysis tools provided through SAS for multivariate analysis, cluster analysis, and analysis of variance, regression, and categorical data. 4. Product Expertise AAIS product development specialists are experts at making sure policy provisions correspond with loss costs and other rating information, and at drafting manual rules that are clear, precise, and easy to follow. This function is essential to success, as a rating plan is only as good as its delivery through manual rules and supporting information. Product expertise is also critical to winning regulatory approval in a timely fashion, an imperative in today s fast-moving market.

10 Loss Cost Range Maps These maps illustrate the value of by-peril rating by providing visual depictions of loss cost ranges for specified perils. The AAIS Homeowners By-Peril Plan helps your company understand exposure levels for any given zone. Massachusetts Owners Base Loss Cost Ranges Liability and Med Pay Illinois Owners Base Loss Cost Ranges Tornado/Hail Illinois Owners Base Loss Cost Ranges Fire Connecticut Owners Base Loss Cost Ranges Hurricane

11 Your Next Steps Companies often face the fundamental question whether to buy or build their product platforms. With the AAIS Homeowners By-Peril Rating plan, you can simply acquire our ready-to-use, complete, and filed program. Or, you can license the program and use it as a foundation to build your own. Either way, you can save time and money by avoiding huge investments in the elements required to build such a plan. Working on behalf of the industry, AAIS shares those costs among many companies. STEP 1 Let AAIS show you the Homeowner By-Peril Rating Plan STEP 2 Review sample risks and compare to your current price points Your first step is to invite AAIS to make a presentation to your product staff to demonstrate the design and structure of the plan and to describe the analysis that went into its development. Next, if you decide that this program might work for you, AAIS can provide loss costs for some sample risks in your underwriting territory. This will enable you to see how pricing under the plan compares to your current price points. STEP 3 Conduct a retrospective analysis of your book of business STEP 4 Approve and implement the Homeowner By-Peril Rating Plan AAIS has built a SAS-based rater that allows you to project the impact of by-peril rating on your book of business. When you decide to proceed, AAIS will provide support for your actuarial, filings, and IT teams as they work to design and execute an implementation strategy. To get started with the Homeowners By-Peril Rating Plan contact: Rick Maka Director of Marketing & Strategic Alliances rickm@aaisonline.com AAIS ext. 222

12 Products you can rely on. Insurers need products that are comprehensive, flexible, and easy to adopt. That s why more than 700 property/casualty companies of all sizes use policy forms and rating information developed by AAIS, a market leader in personal, commercial, agricultural, and inland marine insurance product development. Long-known for our industry-leading inland marine and commercial output programs, AAIS in recent years has set new standards for agricultural property and liability coverage, and led the way in introducing the first bureau plan for rating homeowners policies by peril. AAIS adds value to its products by engaging service providers to support our customers marketing, underwriting, and rating. Program Components: Base forms and endorsement options, updated to address new exposures and market opportunities. State amendatory endorsements, updated to keep programs in compliance. Manual rules for adding endorsements and implementing rating procedures. Loss cost rating information, plus rating factors and procedures in various lines to reflect loss experience, age of systems, and other rating considerations. Filing authorization service is available for almost all programs at no additional cost. Commercial Lines Artisans & Businessowners Commercial Monolines Commercial Umbrella Inland Marine Inland Marine Guide Commercial Output Program Filed Inland Marine Programs Farm & Ag Agricultural Output Program Ag Liability Programs Farm Programs Personal Lines Homeowners & Mobile HO HO By-Peril Rating Plan Personal Monolines Personal Umbrella Watercraft Programs Services Actuarial Governmental Affairs & Product Compliance Product Implementation Statistical & Data American Association of Insurance Services 1745 S. Naperville Road Wheaton, IL p AAIS f