 Several years ago, a major P&C insurer established key business goal Significantly enhance approach to writing Small Commercial  Product / process redesign team was formed which:  Included actuaries, underwriters and systems developers  Initially focused on:  - creation and targeted implementation of new package product - development of efficient supporting process and systems Discuss Small Business, a process for implementing a new package product, and the role that actuaries play... Small Commercial Package Product 1 Introduction...

Small Commercial Characterize Small Business customers...  Definition varies by insurer; reasonable defs. include:  Total premium < $50,000and / or  Revenue < $10 Millionand / or  Number of employees < 50 and  No unusual or prohibited exposures (as defined by company)  Loss control services not required  Account size does not necessarily indicate complexity  Degree of insurance involvement varies significantly among customers 2

Small Commercial Preliminary considerations...  Economics of writing Small Business  Transaction intensive with low average premium per policy  Profitability generally requires creation of low-cost processes  Productive agent relationships may also depend on establishing low-cost processes  Product/process redesign team addressed two issues:  Identify target Small Business segments and classes  Improve efficiency in writing target segments - Package product efficiency Not cost effective to write nontraditional coverages - Process efficiency Redesign quote, approval, issue systems; rate maintenance 3

Small Commercial Package Product Actuaries play a key role in identifying target segments or classes...  Review size of segment and potential market  Total size of market, size distribution of customers, states  Is segment growing or declining?  Predominant lines of business and coverages  What does company and/or bureau data reveal about GL, Property or Package experience by class, segment or SIC group?  Any nontraditional data sources that are of use in analyzing potential target segments? 4

Small Commercial Package Product Improving the Package Product Efficiency...  Why not use ISO Businessowners product?  Advantages of proprietary product  Product control - simplified policy language - simplified or modified rating structure - more ability to customize for target segments or classes  Revisions can be made quickly  Rate revisions can be based on recent data 5

Small Commercial Package Product  Product / process efficiency improvement involved coordinated iterative development in three key areas for the new package product... Forms Systems Rates 6

Systems Forms Rates Small Commercial Package Product  Competitive analyses and agent information resulted in low frills package policy  Several hundred targeted classes supported initially  GL coverages not supported included OCP, RRP, Liquor Liability  Certain types of Property occupancies not supported; limited Inland Marine coverage 7

Rate s Forms Systems Small Commercial Package Product  Rate structure derived from ISO BOP rates  Initial class rate levels set to achieve competitive and profitability goals  Rates for mandatory coverages which had been optional had to be determined  Coding established to facilitate future ratemaking and further analysis 8

 New quote / issuance system developed with:  User-friendly client server functionality  Immediate quote, rapid issuance  More efficient upload of rates and rating formulas  Log of business submitted but not eligible for target segments or classes  First step toward Internet-enabled agent interface and e-commerce Rates Forms Systems Small Commercial Package Product 9

Role of the actuary in New Package Product / Process implementation...  Phase I - Develop product and efficient support process  Work with underwriters to develop rating structure - Identify key rating variables - Design rating methodology which is understandable to agents and customer  Example: - Some of the BOP rating variables are well understood Sprinklered/Nonsprinklered; Construction; Protection - Some rating variables are less well understood Rate Number; Rate Group  Actuary can design rate structure which reflects only desired rating variables 10

Small Commercial Package Product  Phase I - Develop product and efficient support process  Actuary should also assess for targeted segments/classes: - Liability coverage increased limits factors - Deductible credits - Coverage changes  Produce and defend filings for new rate structure and level  Work with Information Services Dept. to create efficient process for rate implementation in quote / issuance system  Design coding that will facilitate detailed analysis as data emerges 11

Small Commercial Package Product  Phase II - Broadening  Product - Agent and Customer preferences will result in pressure to broaden product and covered segments / classes - Actuary can assist by assessing experience for classes which did not fit initial eligibility criteria  Experience analysis - Classification ratemaking is a primary tool - Actuary should look for meaningful relationships beyond initial rating variables  Expansion of System 12

Small Commercial Package Product  Transition Issues  Conversion of renewal book from old to new product must be done gradually over the renewal cycle  May be period during which old and new products are available simultaneously  If old and new pricing structures differ significantly: - Experience analysis may be difficult for a while - Measuring renewal price change will be difficult for one year  Coverage differences between old and new products may necessitate disclosure notices to renewal customers  Filing issues: - May be beneficial to take approach that regulators recognize - Once filed, a proprietary product becomes public information 13

Small Commercial  The role of technology  Rapid quote and issuance is critical for writing Small Business New product development provides opportunity to assess technology capabilities  Agent interface valuable in writing Small Business  Internet-enabled quote/issuance system is point-of-sale oriented  Various P&C insurers are working on internet delivery - May make SEMCI difficult short-term - Movement toward industry standards beginning Technology is critical to success - actuaries should make use of our technical skills to add value in this area 14

Small Commercial  Final comments  The future will not be like the past, especially regarding premium growth  Traditional ratemaking will remain important for pricing, but we must expand our methods to meet the demands of target marketing and efficiency  We should play an important role in helping to leverage technology  We should help our companies to understand the economics of Small Business 15