Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion Our purpose: protect livelihoods and futures  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our Purpose: Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Predictive Modeling in Property Casualty Insurance Iowa Actuaries Education Day February 25, 2015 John Broadrick, Predictive Modeling and Competitive Intelligence VP Farm Bureau Financial Services

2 Agenda  Anti-Trust Statement  Lifecycle of Property Casualty Policies & The Predictive Models That Support Them  Learn More About Predictive Modeling

3  This discussion is intended to present an individual point of view on the topic described herein. Under no circumstances shall this presentation be used as a means for competing companies or firms to reach any understanding – expressed or implied – that restricts competition or in any way impairs the ability of members to exercise independent business judgment regarding matters affecting competition. It is the responsibility of participants to be aware of antitrust regulations, to prevent any written or verbal discussions that appear to violate these laws, and to adhere to every respect the relevant antitrust compliance policy.  For an example of the Casualty Actuarial Society antitrust compliance policy, refer to the CAS website at  All statements and written comments from this presentation are the opinion of the presentor only, and are not necessarily shared by Farm Bureau Financial Services, the Iowa Actuaries Club or the Casualty Actuarial Society Compliance with Casualty Actuarial Society Anti-Trust Policy ANTI-TRUST STATEMENT Please comply with the anti-trust policies of your relevant organization.

4 Agenda  Anti-Trust Statement  Lifecycle of Property Casualty Policies & The Predictive Models That Support Them  Learn More About Predictive Modeling

5 Policy Lifecycle LIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM Policies must be sold, priced and underwritten. Additional policies are cross-sold. Claims are filed and adjusted, and reserves are estimated. Lastly, pricing changes take place every policy period. Policy Acquisition Policy Underwriting Policy PricingCross-Sale Claim Adjustment Loss Reserving Policy Retention

6  Competitive Intelligence – Estimate competitive position of renewal book – Estimate competitive position of prospects – Models options – In house or vendor supplied models  Models to estimate close rates – Estimate close rates based upon competitive comparison and other characteristics – Model options – Logistic models, CART, others  Lead qualification – Identify prospects that are most likely to respond to solicitation – Model options – Logistic models, CART – Incorporate third party consumer data Models Supporting Policy Acquisition LIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM Policy Acquisition

7  Manage rate avoidance – Predict situations where inspections are appropriate – Identify potential inaccuracies in garaging address – Models Examples – Inspection models, use of commercial addresses, unrepaired damage  Tier/Company placement & schedule modification guidance – Estimate expected profitability of the business given the pricing model – Model options – Loss ratio models, offset loss cost models, classification modeling, GLM, CART Models Supporting Policy Underwriting LIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM Policy Underwriting

8  Pricing Models – Loss cost, Frequency, Severity models – GLM very common – Expense models – Cohort studies, duration and expense activities  Scoring – Tier, credit score models, driving scores etc. – Transformations of underlying models, transformations  Territorial segmentation – Integration of geo-demographic data – Integration of competitor relativities – Geospatial smoothing Policy Pricing Models Supporting Policy Pricing LIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

9  Model cross-sale opportunities – Identify prospects likely to purchase additional products – Focus on sales channel, competitive offerings, client information – Primarily logistic models  Distribution models – Evaluate agency characteristics leading to greater product penetration – Evaluate agency characteristics leading to greater client satisfaction – Model options – Logistic models, CART, others Cross-Sale Models Supporting Cross-Sale LIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

10  Claim handling – Predict likelihood of fraudulent activity – Predict likelihood that a given claim will become a represented claim  Production models – Identify elements that lead to claims leakage Claim Adjustment Models Supporting Claim Adjustment LIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

11  Reserve opinion needs to include a reasonable range – Many determined that reasonable range should be statistical confidence intervals – This led to inclusion of many total loss models and reserving models  Model options – Stochastic loss modeling – GLM applications to chain-ladder – Bayesian inference models Loss Reserving Models Supporting Loss Reserving LIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

12  Retention models – Evaluate expected retention applicable to a given change to rates – Models options – Logistic models  Considerations – Competitive position – Experience used to generate the existing model – Regulatory action around pricing models Policy Retention Models Supporting Policy Retention LIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

13 Agenda  Anti-Trust Statement  Lifecycle of Property Casualty Policies & The Predictive Models That Support Them  Learn More About Predictive Modeling

14  Formal Educational Programs – Statistics Undergraduate and Master’s Degree Programs – Executive Education Programs  Massive Open Online Courses (MOOCs) – Udacity – Coursera  Actuarial Literature – ASTIN articles – CAS publications – Exam materials, Variance, CAS University  Books: – Generalized Linear Models, P. McCullagh and John A. Nelder – Applied Predictive Modeling, Max Kuhn and Kjell Johnson – Predictive Modeling Applications in Actuarial Science: Volume 1, Edward W. Frees and Richard A. Derrig Resources LEARN MORE ABOUT PREDICTIVE MODELING

Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion Our purpose: protect livelihoods and futures  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our Purpose: Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Our purpose: protect livelihoods and futures.  Our values: Integrity  Service  Leadership  Accountability  Teamwork  Passion  Proprietary and Confidential