CAS FALL MEETING 2003

CS16 Homeowners Insurance Profitability

A REGULATORY PERSPECTIVE

Dan Davis, FCAS, MAAA

Senior Actuary

Louisiana Department of Insurance

TABLE OF CONTENTS FOR THIS PRESENTATION

• BIGGEST CONCERNS ABOUT THE LOUISIANA HOMEOWNERS MARKET (COMPETITION, HIGH PRICES, VOLATILE RESULTS)

• WHAT HAS BEEN DONE ABOUT HOMEOWNERS INSURANCE VOLATILITY? (CITIZENS PROPERTY INSURANCE CORPORATION, FLEX BAND RATING)

• GENERAL CONCERNS WE HAVE ABOUT RATING VARIABLES

TABLE OF CONTENTS FOR THIS PRESENTATION (continued)

• CONCERNS WE HAVE ABOUT SPECIFIC RATING ACTIONS CURRENTLY TAKING PLACE (HIGHER DEDUCTIBLES, CATASTROPHE MODELS, CREDIT SCORING)

• GUIDELINES REGARDING HOMEOWNERS RATE FILINGS IN LOUISIANA

BIGGEST CONCERNS ABOUT THE LOUISIANA HOMEOWNERS

MARKET

• Industry unwillingness to competitively write in southern Louisiana

• Homeowners prices that are high and increasing quickly

• A shared concern with the industry regarding homeowners insurance volatility

WHAT HAS BEEN DONE ABOUT HOMEOWNERS INSURANCE

VOLATILITY?

1. The Louisiana Citizens Property Insurance Corporation

2. Flex Band Rating

The Louisiana Citizens Property Insurance Corporation

• ACT#1133 2003 legislative session• Created to absorb the 2 residual market

mechanisms, the FAIR plan and the coastal plan. • Modeled in some ways after the Florida citizens

property corporation. • Will obtain tax-exempt status• Will be able to accumulate funds, tax-free in

advance of the next catastrophe

The Louisiana Citizens Property Insurance Corporation

• If accumulated funds become large enough, the assessments can be stopped

• If large catastrophe occurs before the accumulated funds are sufficiently large, the Fund can establish lines of credit using it’s guaranteed assessment powers as collateral.

• Should be a large factor in smoothing Homeowners results

Flex Band Rating

• ACT#351 2003 Legislative Session• intent of legislation -- let insurers file multiple

times in one year as long as the overall effect of rate changes in 12 months doesn’t exceed plus or minus 10% and is actuarially justified

• Act will enable insurers to achieve more consistent profits over time by decreasing the time it takes to get a rate change in either direction

GENERAL CONCERNS WE HAVE ABOUT RATING VARIABLES:

But First ….. A Headline

There are lawyers investigating the possibility of instituting a class action suit against Allstate, State Farm and the Louisiana Insurance Rating Commission concerning the use of credit in rating for Private Passenger Auto and Homeowners.

At the Department we have a preference for rating variables that:

1. Have an obvious cause and effect between the characteristic and the cost to insure

2. are fair to the insured public 3. appear fair to the insured public

4. effectively measure and discriminate risk 5. are not a surrogate for what is considered an

unfair or unjust rating variable6. have been researched to demonstrate that they

are not a surrogate

Questions the Industry should consider regarding the above list:

• In general, with new rating variables, are the insurers willing to defend it against attacks that the financial burden falls disparately on low income people, certain races or certain religions

• Have insurers investigated all other reasonable variables using a multi-variate analysis and is their variable the best in all categories?

• If the Industry cannot keep data on the forbidden categories, how can the Industry certify that the variables they do use are not surrogates for those forbidden ones?

A specific example of public concerns regarding rating variables/databases:

The CLUE database of claims histories

The CLUE database of claims histories

• Is it fair that insureds should pay more because of prior claim history on the house they just bought?

• Does it appear fair that insureds should pay more because of prior claim history on the house they just bought?

• Can the insured public be convinced of this? • How?

The CLUE database of claims histories

• What about the overall fairness of the CLUE database?

• Who should oversee it’s administration? • Is the data in CLUE fair and thorough, i.e.

reflective of all insured experience in the state?

CONCERNS WE HAVE ABOUT SPECIFIC RATING ACTIONS:

1. Higher Deductibles, including Hurricane deductibles

2. Catastrophe Models

3. Credit Scoring Models

Higher Deductibles, including Hurricane deductibles

• No option to buy-back.• Poor communication regarding the effect of the

higher deductible, particularly in the case of the Hurricane deductibles where the effect can be dramatic to insureds.

Catastrophe Models

Insurers who use these models must file information about them with the Louisiana

Department of Insurance.

Catastrophe Modelsconcerns

• material variation in predicted loss cost for this insured database from one model to another.

• company actuaries generally cannot explain these models or the variations in these models to our satisfaction.

• a full understanding of some of these models would require testimony from a multi-disciplinary team of meteorologists, structural engineers, economists and statisticians, just to mention a few.

Catastrophe Models

• A definite positive concerning these models is that they do promote stability in the rates because they don’t fluctuate materially because of events occurring in the recent past. Other methodologies might overreact to these recent events.

Credit Scoring Models

Act #1256 of the 2003 Louisiana Legislative Session in Louisiana enacted certain laws regarding the use of credit scoring. It is similar to NCOIL’s Model Act. It also follows the Federal Fair Credit Reporting Act with selective emphasis on certain public interests. The law forbids insurers using credit scores/financial scores from certain actions

Credit Scoring Models – Forbidden Actions

• Using an insurance score based on income, gender, address, zip code, ethnic group, religion, marital status or nationality

• Deny, cancel or nonrenew a policy based solely on credit information

• Base an insureds’ renewal rates solely on credit information

Credit Scoring Models – Forbidden Actions

• Take an adverse action against an insured simply because of the lack of a credit card or credit history

• Take an adverse action against a consumer without using credit information obtained within the last 180 days

• Use the following as a negative factor in computing an insurance score:

Credit inquiries requested by the consumer Periodic inquiries by existing credit providers

Credit Scoring Models – Forbidden Actions

Inquiries relating to insurance coverageCollection accounts with a medical industry codeMultiple lender inquiries from the Home

Mortgage Industry

Act #1256 Exemptions from the use of credit

• A medical crisis• Death of a spouse• Identity theft• A catastrophic event as deemed by the

Commissioner of Insurance

Guidelines Regarding Homeowners Rate Filings in Louisiana:

A Good Rate Filing Is One That

• Another actuary practicing in the same field should be able to review and understand without having to request supporting data or analysis.

• Filing parameter selections should be supported by data, analysis or both. No material parameter selection should be merely assumed.

• Narrative about the thought process involved in the analysis is often helpful. Is particularly helpful when the methodology has changed since the last review.

• We favor the use of Louisiana experience wherever possible. We do understand it isn’t always possible.

Some Differences Under Flex Rating – 1/1/04

• Less time available to work out issues with the filing and the actuarial analysis

• More disapprovals for incomplete or poorly supported filings

• Nevertheless, less time needed for a typical rate change as the disapprovals will be announced by an order from the actuarial department. This order will specify how the filing was lacking.

• Company may refile as soon as they correct deficiency.