Businessowners (BOP) Class Plans 2003 CAS Ratemaking Seminar March 27-28, 2003 Robert J. Walling, FCAS, MAAA

Traditional BOP Rating Features Large, traditional territory definitions Clustering of occupations Clustering of fire protection classes Simple approach to amount of insurance (AOI) Significant U/W discretion (Schedule credits) Bundled (composite) class rate

Businessowners Problems Market has disagreed on: – Which classes to cluster/target – Construction relativities – Territory definitions – Occupancy factors (Malls, Single Occupancies, Multiple Occupancies w/ Restaurants) Many rating factors available but not incorporated into rating sequence U/W Tiers & Credits Gone Amok

BOP Relativity Differences

How can credits be abused? Company Tiering Factor Schedule Max/Min Percent of Manual Barbershop I.C %175% Barbershop I.C %75% Vanilla I.C %140% Vanilla I.C %60% BTA I.C %119% BTA I.C %51% TPet I.C %98% TPet I.C %42% THE HIGHEST NET RATE IS OVER FOUR TIMES THE LOWEST!!

BOP Pricing Enhancements Revise class factors Revise territories using zip codes – May have impact similar to Homeowners on Protection Create more sound AOI curve Improve predictive accuracy of net pricing – Reduce reliance on underwriting discretion – Add financial info and other insured characteristics – Add rating/tiering factors for application information currently not rated

BOP Solutions – What are Companies Doing? Many use ISO class codes with class deviations or individual class factors Some have homeowners-like amount of insurance curves A few use tiering programs like Personal Lines underwriting guidelines to use additional app information

BOP Pricing Enhancements Revise class factors Revise territories using zip codes – May have impact similar to Homeowners on Protection Create more sound AOI curve Improve predictive accuracy of net pricing – Reduce reliance on underwriting discretion – Add financial info and other insured characteristics – Add rating/tiering factors for application information currently not rated

Approaches to Improving Net Pricing Status quo Build a better underwriter “One and Done” tiering One way factors (e.g. “Mall Credit”) Multivariate U/W scoring systems

How to Build a Better U/W Improve accuracy of manual rates by class – Especially for “flow” classes (office, book store, etc.) – Automation increases rating algorithm flexibility and ease of implementing new rating factors Focus attention on larger risks and classes – Has expense implications as well Treat U/W as a pricing variable! – Accentuate the positives! – Train, remediate, and reunderwrite the negatives

BOP Regional Underwriting Review Percent of Manual Program50-74%75-99%100% %> 125% Contractors123%111%84%82%68% Habitational104%103%107%95%93% Office96%104%102%92%109% Restaurant117%113%111%114%112% Retail/Service110%101%93%95%98% Wholesale80%92%90%113%122%

BOP Solutions – Underwriting Scoring Systems Take data off the application that is not rated: Percent Occupied Elevators Years in Business Years of Same Mgt. Age of Building Updated Systems Alarms Sole Occupancy Computer Back Ups Hours of Operation Building Height Deliveries? Swimming Pools Franchise? Safety Program # of Employees/Leasing Out of schedule credits and into rating

Underwriting Scorecard Example

Problem with his Approach - Interactions and Overlaps

Interactions Example

Underwriting Scorecards Reflecting Interactions Multivariate analysis allows the modeling of interactions and modern policy management systems facilitate the implementation of more complex tiering systems