1. PERSONAL LINES RATEMAKING – WHAT’S DOWN THE ROAD? Midwest Actuarial Forum – September 21, 2007 Jeffrey L. Kucera, FCAS, MAAA – Sr. Consultant EMB America LLC

2. Agenda History Developments Predictions Summary Questions Quick History Recent Developments Predictions Summary Questions

3. Quick History History Developments Predictions Summary Questions Private Passenger Automobile (50s – 90s) –Tendency to follow ISO or major writer –Class plan expansion in late 60s and early 70s –Easy to obtain competitor information –Company rating plans were well known

4. Quick History History Developments Predictions Summary Questions Private Passenger Automobile (Late 90s) –Tiering became the fad –Use of multiple companies –Credit introduced by some of the major players –Rethinking of information sharing

5. Quick History History Developments Predictions Summary Questions Private Passenger Automobile (2000s) –Credit used extensively –Multivariate analysis use spreading –Companies looking to expand market –“Black Box” pricing becoming more common place

6. Quick History History Developments Predictions Summary Questions Homeowners (50s – 90s) –Tendency to follow ISO or major writer –Easy to obtain competitor information –Company rating plans were well known –Rating focused on the dwelling –Little innovation

7. Quick History History Developments Predictions Summary Questions Homeowners (Late 90s) –Rethinking of information sharing –Innovation still lagging private passenger auto –A few companies beginning to think about credit and prior losses for rating—but it is very limited –Major emphasis still on dwelling, not occupants

8. Quick History History Developments Predictions Summary Questions Homeowners (2000s) –Credit and prior losses used extensively –Rating by age extended to other end of spectrum –Multivariate analysis use spreading, but well behind private passenger automobile –Some additional expansions of rating variables –Major concerns continues to be catastrophe exposure

9. Recent Developments History Developments Predictions Summary Questions Private Passenger Automobile –Multivariate analysis commonplace for large and medium sized companies –No longer ‘common’ rating plans, making rate comparisons a new science –More sophisticated companies considering life time value –Everyone looking for next “credit”

10. Recent Developments History Developments Predictions Summary Questions Private Passenger Automobile –Interactions between rating variables expanding, e.g. credit and age –Manuals becoming “convoluted” to mask what company is really doing –Territory boundaries and rating seems next logical step for many

11. Recent Developments History Developments Predictions Summary Questions Homeowners –Multivariate analysis is more commonplace, but not as wide spread as for automobile –Some companies doing by-peril analysis, but not necessarily by-peril rating –Rating algorithms are using many more items related to the occupants of the home –Catastrophe exposure and long-term profitability still the focus for many companies

12. Predictions History Developments Predictions Summary Questions Private Passenger Automobile & Homeowners –Things will only get more complicated and more confusing –Multivariate analysis will be commonplace –Significant changes to territory definitions is around the corner, and on a coverage or by-peril basis

13. Predictions History Developments Predictions Summary Questions Private Passenger Automobile & Homeowners –Number of rating variables, and combination of rating variables, will expand significantly –Data will be more important/critical than ever –Biggest winner may be company who unlocks ability to easily get data at time of application

14. Predictions History Developments Predictions Summary Questions Private Passenger Automobile & Homeowners –Lifetime customer value will find it’s way indirectly into pricing –Optimized pricing will offer a significant advantage to early users –These two items will drive retention modeling to heightened awareness within the industry

15. Predictions History Developments Predictions Summary Questions Private Passenger Automobile –Household Averaging Eliminate agent assignment Recognize users drive more than one car –Vehicle Symbols Company customization Quicker response to newer models

16. Predictions History Developments Predictions Summary Questions Homeowners –By-Peril Rating will become the norm, instead of the exception –Potentially more changes than auto, because not as much attention has historically been paid to this line –Various scoring models will be introduced Building Construction Score Fire Protection Score

17. Summary History Developments Predictions Summary Questions Changes over the next several years will be significant Major impediments to change include: –Information Technology –Management’s willingness to accept change –Unknown Regulatory Environment with respect to changes that may be made

18. Summary History Developments Predictions Summary Questions Actuaries need to learn how to drive change –How best to evaluate data –How to present findings and learning so as to be usable by the organization Companies that dedicate themselves to change, and develop processes for continued change, will be the biggest winners

19. QUESTIONS?? History Developments Predictions Summary Questions

20. For information or questions regarding this presentation, please contact Jeff Kucera at: Phone: 312/986-1425 extension 2013 Email:jeff.kucera@embamerica.com Website:www.embamerica.com Mission: EMB America seeks to help our clients solve complex problems and identify opportunities by providing the appropriate blend of value-added consulting and state-of-the-art software. In so doing, EMB America strives to develop long-term relationships with clients and to be the consulting firm of choice for the business community.www.embamerica.com