Rating Plan Design… Where the Rubber meets the Road in Ratemaking… Ellen Berning, FCASJeff Thompson, MBA Segmentation DirectorState Manager Allied Insurance CompanyEncompass Insurance CAS Ratemaking Seminar March 10, 2005 PL - 6

2 Traditional Rating Plan Design Research and development of new rating plans and relevant pricing has often been the domain of actuarial while verification, maintenance and other operational issues fell to other areas Operational criteria often determine whether a new rating variable is economically viable. Increased communication between actuarial, underwriting, and field offices is essential in today’s increasingly competitive environment

3 Rating Plan Design An Integrated Approach The Scenario - California Wildfires ( images/wildfire.jpg)

4 Overview of Rating Plan Design

5 Key Elements of Integrating Rating Plan Design Scenario -Idea of New Discount “Red Paint” homes survived brush fires with less damage than other color painted homes Claim confirmed this observation throughout the devastated region

6 Key Elements of Integrating Rating Plan Design Research & Development/Pricing Currently system does not collect paint color of homes Questions for data analysis: Is a “red paint” fire resistive? Is all red paint or certain manufacturer? Is it a specific range of pigmentations?

7 Key Elements of Integrating Rating Plan Design Research & Development/Pricing Currently system does not collect paint color of homes Questions for data analysis: Is a “red paint” fire resistive? Is all red paint or certain manufacturer? Is it a specific range of pigmentations? Gather data to support discount: Use industry, vendor, home builder or paint manufacturer information, claim data Contact insured/builders about brand of paint used Contact manufacturers for a red paint ingredients Internet research on paint pigments and fire resistivity

8 Key Elements of Integrating Rating Plan Design Research & Development/Pricing Currently system does not collect paint color of homes Questions for data analysis: Is a “red paint” fire resistive? Is all red paint or certain manufacturer? Is it a specific range of pigmentations? Gather data to support discount: Use industry, vendor, home builder or paint manufacturer information, claim data Contact insured/builders about brand of paint used Contact manufacturers for a red paint ingredients Internet research on paint pigments and fire resistivity Determine the appropriate amount of discount Determine the impact of discount on book of business

9 Key Elements of Integrating Rating Plan Design Underwriting How is discount applied? Agent or system applied ‘Red paint” determined by observation or special skills?(e.g. not color-blind, knowledge on manufacturer, fire resistivity)

10 Key Elements of Integrating Rating Plan Design Underwriting How is discount applied? Agent or system applied ‘Red paint” determined by observation or special skills?(e.g. not color-blind, knowledge on manufacturer, fire resistivity) Protect integrity of rating plan Is a verification process needed? How much is the discount? “We’re Watching” effect Expected distribution is too high?

11 Key Elements of Integrating Rating Plan Design Underwriting Execution & Processing Determine Potential Verification Options Back End Spot-check -Manual Process to review proof of “Red Paint” Home inspection - Photos Agent drive-by Homeowner questionnaire

12 Key Elements of Integrating Rating Plan Design Underwriting Execution & Processing Determine Potential Verification Options Back End Spot-check -Manual Process to review proof of “Red Paint” Home inspection - Photos Agent drive-by Homeowner questionnaire Evaluation of Options Field Impact -Regional Office, Agent Legal Implications Customer Impact Develop Cost/Benefit analysis -E.g. system cost to create new screens for new discount, inspection cost

13 Key Elements of Integrating Rating Plan Design Underwriting Execution & Processing Determine Potential Verification Options Back End Spot-check -Manual Process to review proof of “Red Paint” Home inspection - Photos Agent drive-by Homeowner questionnaire Evaluation of Options Field Impact -Regional Office, Agent Legal Implications Customer Impact Develop Cost/Benefit analysis -E.g. system cost to create new screens for new discount, inspection cost Find the optimal verification solution If verification is not feasible, discuss w/ Research & Development

14 Key Elements of Integrating Rating Plan Design Underwriting Execution & Processing Monitor implemented cost justified process Continuous evaluation of effectiveness of verification process Send survey to homeowner upon renewal (paint color can be easily changed) Reinspect periodically Determine actual vs expected distributions Evaluate loss experience Review Cost/Benefit on a regular basis to support process continuation Observe Agent Behavior -Non Compliance measurement

15 Key Elements of Integrating Rating Plan Design Underwriting Execution & Processing Monitor implemented cost justified process Continuous evaluation of effectiveness of verification process Send survey to homeowner upon renewal (paint color can be easily changed) Reinspect periodically Determine actual vs expected distributions Evaluate loss experience Review Cost/Benefit on a regular basis to support process continuation Observe Agent Behavior -Non Compliance measurement Ongoing Review of Comprehensive Impact on Business System

16 Key Elements of Integrating Rating Plan Design Research & Development/Pricing Information collected during verification and maintenance process may supplement data collected through more traditional means Pricing of factor can be refined as various types of data is collected Other types of information showing up in loss data While red paint more fire resistive, more venerable to hail damage

17 Key Elements of Integrating Rating Plan Design Research & Development/Pricing Data collection leads to information on other paint colors, leads to implementation of a “pigment factor” Any effects on results due to marketing campaigns? Attract more customers with red houses Encourage more customers to paint houses red Is the effect due to customer characteristics – those who would chose to paint a house red, and not from the pigment itself?

18 Research& Development, Pricing Underwriting Execution& Processing Underwriting Execution& Processing Integrated Rating Plan Design Strategies Explore Data Verification Options Gather&Analyze Data Develop Data Verification Processes Compliance&Quality Performance Tracking& Analysis Review Measures of Success…further Development??? Key Elements of Integrating Rating Plan Design With all parties of the Integrated Strategy at the Table: Are we comfortable with the results? Commitment to monitor results on an ongoing basis? Commitment to utilize the process for alterations

Questions?