CAS RPM SEMINAR · 2015-03-13 · Rating Variables Relative Competitive Importance Degree of...

CAS RPM SEMINARSmall Business Rating Plans: Challenges & Innovations

© 2015 Towers Watson. All rights reserved.

Chris McKenna, FCAS, MAAA

March 11, 2015

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Overview

BOP Industry Trends

Rating Plans

Underwriting Approaches

Competitive Analysis

Qualitative

Quantitative

towerswatson.com© 2014 Towers Watson. All rights reserved.

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Survey Question #1: What is the average premium for a BOP policy?

A. Less than $2,000

B. $2,000 - $4,000

C. $4,000 - $6,000

D. $6,000 - $8,000

E. More than $8,000

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towerswatson.com© 2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

4

BOP Industry Trends


Survey Question #2: Which of the following aspects do companies feel the most competitive pressure for rating/writing BOP risks?

A. Classification rating

B. Liability exposure bases

C. Developing underwriting tiers

D. Introduction of business owner characteristics

E. Increased automation at the point of sale (i.e., no touch by underwriters at point of sale)


Introducing tiers into manual rates, which incorporates new variables (including business owner characteristics); this allows for increased rate segmentation and increases in consistency/objectivity

Incorporation of UW info into rating plan

Allowing greater rate segmentation across class codes and other rating aspects, including amount of insurance (AOI) curves and age of building

Increased rate refinement across classes of business

Using a separate rating algorithm for liability that uses liability-specific exposure bases for all market segments

Expanding approach to liability rating

Adopting market-centric approach, which allows for greater ease of monitoring, analyzing and changing rates by market segment (office, retail, habitational, etc.).

Adoption of market segmentation focus

Developing a more efficient approach to verifying risk info (including external data sources); triage risks for appropriate level of underwriter review (no touch / light touch / heavy touch)

Improve automation at point of sale

As competition intensifies, companies are increasing the sophistication within their BOP rating plans

6


Example — Underwriting (profit) scoring models

• Profitability scoring models rank risks according to the profitability underlying current rates

• Model predictors can include existing rating variables and/or new underwriting information (internal or external data)

Raw ScorecardLoss Control Company Size

Yes 0 Small 0

No 7 Medium 9

Large 6

Claims

0 -3 Policy Tenure

1 +5 New 12

2 15 1 7

3+ 20 2 4Scoring rules generated from expected

losses from the final models.

Score

< 20

20 – 25

26 – 30

31+Cumulate rules to generate

policy level scores

Score Factor

< 20 0.90

20 – 25 1.00

26 – 30 1.05

31+ 1.20Derive score factors through

modeling techniques


Underwriting scores can be used in a variety of ways

• Accept/Reject/Refer

• Tiers with a relatively small (e.g. 3) or large (e.g. 50+) number of price points

• Schedule rating guidance

• Combinations of the above


Illustrative underwriting (profit) score

9

0

2

4

6

8

10

12

14

16

18

20

-0.5

0

0.5

1

1.5

2

2.5

3

Score

Relativity = 0.35

Relativity = 3.0

Relativity = 1.0break-even without score

Underwriting Score


Accept/Reject Scoring

10

0

2

4

6

8

10

12

14

16

18

20

-0.5

0

0.5

1

1.5

2

2.5

3

Score

Relativity = 1.5

at Score = 40

Accept Reject

Underwriting Score


Tiers

11

0

2

4

6

8

10

12

14

16

18

20

-0.5

0

0.5

1

1.5

2

2.5

3

Score

Tier #2 = 1.0

Tier #3 = 2.0

Tier #1 = 0.4

Underwriting Score


Schedule Rating

12

0

2

4

6

8

10

12

14

16

18

20

-0.5

0

0.5

1

1.5

2

2.5

3

Score

Debit

Max 25% CreditMax 25% Debit

Credit1.0

Underwriting Score


Tiering with schedule rating

13

Score

25% Debit

Tier #1 = 0.4

Tier #2 = 1.0

Tier #3 = 2.0

25% Credit

25% Credit

Tiering

Schedule Rating

Underwriting Score


Survey Question #3: What percentage of BOP risks are written without any underwriter “touch” or schedule rating adjustment?

A. Less than 20%

B. 20 – 40%

C. 40 – 60%

D. 60 – 80%

E. More than 80%


Increased rating plan sophistication can improve process flow and allow for better underwriter utilization

15


With increased confidence in rating plan, company’s underwriting resources can be better allocated

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# of Policies % of Risks w/ IRPM

Premium Size (per policy)

2,197

3,188

1,922

1,202

675

1,300

1.0%3.5%

8.2%

15.9%

38.0%

72.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

< 1,000 1,000 - 1,999 2,000 - 2,999 3,000 - 3,999 4,000 - 4,999 > = 5,000


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Competitive Market Analysis (CMA) – Qualitative


Insurers use various approaches to CMA — we will consider qualitative and quantitative

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High Degree of Sophistication

Low Degree of Sophistication

CMA: Qualitative Rate Analysis

Company Statistics

Competitor Rate and Product Changes

Agent Feedback

CMA: Quantitative RateAnalysis

CMA: Product Analysis

These options are not mutually exclusive —different approaches can be used in combination


A qualitative rating plan analysis may identify key strengths, gaps and enhancement priorities of your BOP rating plan

Qualitative Rating Plan Analysis

Finalize project planning and

launch project

Step 1

Collect competitive information

Step 2

Prepare and deliver report

of findings

Step 4Step 3

Conduct competitive

analysis

Select target (and backup) state for data collection

Agree on target competitors and determine relevant writing companies

Gather rating plans and related filings for target competitors from departments of insurance websites, or third-party vendors

Confirm/ensure collection of latest company filings May need to reach

beyond target state

Summarize and document findings and conclusions Key strengths and

weaknesses of BOP rating plan and recommended priority enhancements

Detailed comparison of rating plan components

Review findings/ recommendations with all key stakeholders

Evaluate each major rating variable based on degree of segmentation As relevant, range of

individual price points and range of factors

Develop supplemental assumptions to fill gaps, as necessary


A qualitative analysis includes review of each rating variable, organized by category

Variable Type/Category Coverage Rating algorithm, exposure bases, limits, deductibles

Territory Building-related variables Construction type, protection class, sprinkler credit, age of building

Insured-related variables Market segment, class of business, number of locations Years in business, claim history, payment history, credit score

Insurance score/ tier Additional rating mechanisms Schedule rating Experience rating

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0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

0 5 10 15 20 25 30 35 40 45 50

Company ABCCompetitor 1Competitor 2Competitor 3

Age of building: there is a wide variety of approaches to rating for the newest buildings

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Building Age (Years)

Factor Age of Building Relativity


0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

1 2 3 4 5 6 7 8 9 10

Company ABCCompetitor 1Competitor 2Competitor 3Competitor 4

Protection class: Company ABC has a significantly wider range of relativities than its competitors

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Protection Class

Relativity Protection Class Relativity


Amount of Insurance (AOI): Companies use different approaches to AOI curves

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0

20

40

60

80

100

120

Amount of Insurance

$3 million$2 million$1 million

Relativity Amount of Insurance — Building

Note: Factor is based on the rate at each AOI divided by the rate at AOI of $25,000, which is assigned a factor of 1.0.

Competitor 2

Company ABC

Competitor 3

Competitor 1


In its territorial rates, one of Company ABC’s competitors distinguishes between the east and west of Iowa and between urban, suburban and rural zip codes

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A qualitative rating plan analysis highlights important competitive gaps that may impede profitable growth

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Rating Variables

Relative Competitive Importance

Degree of Segmentation

Company ABC Competitor 1 Competitor 2 Competitor 3

Overall rating approach

Territory

Building-related

Insured-related

Additional rating mechanisms

Overall

Very HighMediumLow HighN/A Key Gap =

Summary Comparison of Rating Sophistication by Category


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Competitive Analysis – Quantitative


The quantitative CMA focuses on actual pricing for a sample of risks (based on rating algorithms in competitors’ rate filings)

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Quantitative Rating Plan Analysis

Finalize project planning and

launch project

Step 1

Developalgorithm alignment

Step 2

Prepare and deliver report

of findings

Step 4Step 3

Create input database

Collect competitive information

GenerateCompany ABCand competitor

premiums

Step 5 Step 6

Agree on target state for analysis

Agree on target competitors and writing companies Ideally, competitors will

be those selected for the qualitative analysis

Agree on industry target segments and define sample risk profiles

Create competitor algorithms in Excel or other software based on rule/rate manuals to generate premiums

Create database of all necessary rating information

Agree on assumptions/approach for populating variables that competitors use and for which Company ABC does not collect data

Summarize and document findings and conclusions, e.g.: Detailed summaries

of competitive position by segment

Types of risks for which Company ABC is most likely to have a higher or lower price than the competitors

Recommended enhancements

Review findings/ recommendations with all key stakeholders

Generate premiums for sample risks identified in Step 1 using input database

Create charts to display the premiums for all sample risks

Present initial results to actuarial and/or underwriting for review/feedback

(Optional) Present initial results to a handful of agents for feedback/validation

Gather rating plans and related filings for target competitors It is likely that the

materials gathered for the qualitative rating plan analysis will be sufficient

However, you may need to obtain external/competitor information on certain rating variables not used by Company ABC

Develop alignment of competitor algorithms with Company ABC

Validate results with competitor filing information (as available)

Note: Final alignment will be used as input into Steps 4 and 5


A quantitative CMA will compare Company ABC premiums to competitors’ premiums on a defined customer dataset for a selected state(s)

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524

142 130

797

523

252 285

710

15255

1,060

917

$0

$200

$400

$600

$800

$1,000

$1,200

Building Contents Liability* Total

Company ABC

Competitor 1

Competitor 2

BOP Average Premiums

CoverageBeware of potential inherent bias in using current policy mix of business


The quantitative CMA will compare pricing by rating factor/segment

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0

100

200

300

400

500

600

700

800

900

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31+

Policy Count

Relativeto Market

building age (upper bound)

Rate Competitiveness by Building Age

Policy Count Relative to Market Market Average


A quantitative CMA will compare Company ABC’s price to each competitor for the sample of risks

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% of risks where Client price is 20% or more below the competitor

% of risks where Client price is 20% or more above the competitor

BOP Example – Relative Competitiveness

13%

43%

45%

31%

40%

50%

56%

17%

5%

0% 20% 40% 60% 80% 100%

Company 3

Company 2

Company 1

CAS RPM SEMINAR · 2015-03-13 · Rating Variables Relative Competitive Importance Degree of...

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