rating plan design… where the rubber meets the road in ratemaking… ellen berning, fcasjeff...

Rating Plan Design… Where the Rubber meets the Road in Ratemaking…

Ellen Berning, FCAS Jeff Thompson, MBASegmentation Director State ManagerAllied Insurance Company Encompass Insurance

CAS Ratemaking SeminarMarch 10, 2005

PL - 6

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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

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Rating Plan Design An Integrated Approach

The Scenario - California Wildfires(www.colliercountyredcross.org/ images/wildfire.jpg)

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Overview of Rating Plan Design

Introduce a “Red Paint” Discount

Research & Development,

Pricing

Underwriting Execution & Processing

UnderwritingUnderwriting Execution & Processing

Integrated Rating Plan

Design Strategies

Explore Data Verification Options

Gather & Analyze Data

Develop Data Verification Processes

Compliance & Quality Performance Tracking &

Analysis

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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



Pricing




Design Strategies





Analysis

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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?



Pricing




Design Strategies





Analysis

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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



Pricing




Design Strategies





Analysis

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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



Pricing




Design Strategies





Analysis

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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)



Pricing




Design Strategies





Analysis

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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?



Pricing




Design Strategies





Analysis

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Determine Potential Verification Options

Back End Spot-check -Manual Process to review proof of “Red Paint”

Home inspection - Photos Agent drive-by Homeowner questionnaire



Pricing




Design Strategies





Analysis

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Determine Potential Verification Options



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



Pricing




Design Strategies





Analysis

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Underwriting Execution & Processing Determine Potential Verification Options



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



Pricing




Design Strategies





Analysis

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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



Pricing




Design Strategies





Analysis

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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



Pricing




Design Strategies





Analysis

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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



Pricing




Design Strategies





Analysis

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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?



Pricing




Design Strategies





Analysis

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Pricing




Design Strategies





Analysis

ReviewMeasures ofSuccess…furtherDevelopment??? 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?

rating plan design… where the rubber meets the road in ratemaking… ellen berning, fcasjeff...

Documents

paint pigments

data analysis

new discount red paint

paint manufacturer information

paint color of homes

new rating variable

certain manufacturer

color painted homesclaim