Businessowners (BOP) Class Plans 2004 CAS Ratemaking Seminar March 11, 2004 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) Lots of information gathered on application, but not incorporated into rating U/W Tiers & Schedule Credits Overwhelm Manual Rating

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

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 and Agent as a pricing variable! – Accentuate the positives! – Train, remediate, and reunderwrite the negatives

BOP Agency Management 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

Parting Thoughts Where there is no vision, the people perish. – Proverbs 29:18 The data’s ready, The technology’s ready, ARE YOU READY???