1 COM - 29 Package Pricing for Small Commercial Accounts Roy G. Shrum

2 Ratemaking Philosophy Needed revenue estimate is future oriented All costs need to be covered Internal targets need to be satisfied Optimal growth in targeted areas Steady, non-disruptive, rate actions Rate change is one of several levers to address unfavorable results.

3 Unique Small Package Issues Expansive collection of coverages –changing conditions –creative interpretation in unintended ways Evolving marketplace Indivisible premium Rating Parameters Loss characteristics

4 Unique Small Package Issues Expansive Coverages $25,000 Accounts Receivable $25,000 Sewer/Drain Back-up $1000 Antennae & Satellite Business Inc. -actual loss sustained $10,000 Debris Removal $5,000 Deferred Payments $10,000 Employee Dishonesty Functional Replacement Cost Full Coverage Glass $10,000 Money & Securities $500,000 Newly Acquired Bldgs. $10,000 Off-Premises Power or Water Failure $5,000 Patterns, Dies, and Molds +50% Peak Season Protection $25,000 Property - Other Locations $5,000 Signs - all-risk coverage $5,000 Tenants Lease Protection $25,000 Valuable Papers Premises Liability Products Liability $10,000 Medical Expenses

5 Unique Small Package Issues Evolving Marketplace Store Owners Endt. New Select Custom Pkg. Car Wash Program EPL Coverage Form Livestock Marketing Program Recyclers Custom Program Power or Communications Failure Grocers Advantage Endt. Food Contamination Endt. Tire Retreading and Siping Form New Leisure Camp Program Mini-Warehouse Coverage Form Funeral Directors Prop.of Others Artisans Advantage Apartment Association Program Home Business Insurance Plan Car Wash Direct Deductibles Form Auto Services Program RV Dealers Program Day Care Center Program

6 Unique Small Package Issues Evolving Marketplace -- Response Ear Piercing Liability –Relationship to other classes, underwriting controls, nature of risk Physicians Equipment –Bureau loss costs, competitors, relationship to other options New Coverage Extensions –Build into base or new optional coverage? Credits/Discounts –Does justification continue? –Verifiable at inception… verifiable after inception

7 Unique Small Package Issues Indivisible Premium Loss Profile –Template counts and amounts by size by major (and minor) coverage component. –Current aggregates and state Book Profile –Class, years in business, building ages, protection class, financial scores, line mix, pricing tier, optional coverage purchases –Ratable and non-ratable elements. –Underwriting insights into importance

8 Unique Small Package Issues Rating Parameters Class –Rate Groups Homogeneity Underwriting controls –Relationships between Territory –Underlying demographic changes –More localized exposure patterns

9 Unique Small Package Issues Loss Characteristics -- Trend Economic Drivers –Property Nonresidential Structures Price Index (BEA) PPI -- Lumber, Metal Products (BLS) Business Durable Equipment (BEA) –Liability WC Medical Cost Index (NCCI) CPI -- Total Medical, Hospital (BLS) –General Core CPI ex Food & Energy (BLS) Consumer Confidence Index

10 Unique Small Package Issues Loss Characteristics -- Trend Bureau –Econometric, internal –Applicability as to: size of underlying exposure nature of exposure mix of inherent coverages Peer Competitors –More applicable but unique company characteristics Internal Data –Volume –Mix of inherent coverages

11 Unique Small Package Issues Loss Characteristics -- Trend Bureau Annual Severity Changes:

12 Unique Small Package Issues Loss Characteristics -- IBNR Expectation by Program Reconciliation to Financial Reports Size of Risk Considerations

13 Unique Small Package Issues Loss Characteristics -- IBNR Bureau Loss Development Links: