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
State X BOP Relativity Analysis
0.25
0.75
1.25
1.75
2.25
2.75
Construction/Protection
Re
lati
vit
y
ISO BldgCO 1 BldgCO 2 Bldg
BOP Relativity Differences
State X BOP Relativity Analysis
0.60
0.80
1.00
1.20
1.40
1.60
Construction/Protection
Re
lati
vit
y
ISO CntCO 1 CntCO 2 Cnt
How can credits be abused?
Company
Tiering
Factor
Schedule
Max/Min
Percent of Manual
Barbershop I.C. 1.25 +40% 175%
Barbershop I.C. 1.25 -40% 75%
Vanilla I.C. 1.00 +40% 140%
Vanilla I.C. 1.00 -40% 60%
BTA I.C. 0.85 +40% 119%
BTA I.C. 0.85 -40% 51%
TPet I.C. 0.70 +40% 98%
TPet I.C. 0.70 -40% 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
Program 50-74% 75-99% 100% 101-125% > 125%
Contractors 123% 111% 84% 82% 68%
Habitational 104% 103% 107% 95% 93%
Office 96% 104% 102% 92% 109%
Restaurant 117% 113% 111% 114% 112%
Retail/Service 110% 101% 93% 95% 98%
Wholesale 80% 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
Underwriting Score Points - D&B Financial Assessment
Strength High Good Fair Limited5A 250 250 200 1504A 250 250 200 1503A 250 250 200 1502A 250 200 150 1001A 250 200 150 100BA 250 200 150 100BB 250 200 150 100CB 200 200 150 100CC 200 200 150 100DC 200 150 100 50DD 200 150 100 50EE 200 150 100 50FF 200 150 100 50GG 200 150 100 50HH 200 150 100 50
Absence 250 200 150 100
Composite Credit Appraisal
Underwriting Scorecard Example
Years of PercentCurrent Score Building ScoreControl Points Occupied Points
>10 150 >95% 1006-10 75 65-95% 500-5 0 <65% 0
Part Time/ Score Safety ScoreFull Time Points Program Points
<33% 50 Formal 5033% - 67% 25 Informal 25
>67% 0 None 0
Building < 25 Yrs Old 25 Pts Owner on Premises 15 PtsCentral Alarm 25 Pts Franchise 10 PtsNo Parking Lot 10 Pts Closed by 9 pm 10 PtsOffsite EDP Backup 5 pts No Delivery 5 pts
Underwriting Scorecard Example
Cumulative TieringPoint Range Factor
0 - 99 1.00100 - 199 0.92200 - 299 0.84300 - 399 0.76400 - 499 0.68500 - 599 0.60600 - 700 0.52
Problem with his Approach - Interactions and Overlaps
1.70
1.32
1.19
1.04
0.86
0.73
1.51
1.24
1.12
1.00
0.90
0.81
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
1 2 3 4 5 6
Level
Ind
ica
ted
Ra
te D
iffe
ren
tia
l
Loss Ratio
GLM
Interactions Example
Pure Premium Relativities by Program and Years in Business
0-3 4-6 7-10 10+
Years in Business
Pu
re P
rem
ium
Re
lati
vit
y
Contractors
Habitational
Office
Restaurant
Retail/Service
Wholesale
Underwriting Scorecards Reflecting Interactions
Multivariate analysis allows the modeling of interactions and modern policy management systems facilitate the implementation of more complex tiering systems
Years ofCurrentControl Contr. Habit. Off. Rest. Ret./Serv. Wholes.
0-3 60 115 120 70 95 1004-6 100 130 125 85 100 110
7-10 120 135 135 100 120 12510+ 150 150 150 150 150 150
Score Points