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COM - 29 Package Pricing for Small Commercial Accounts

Roy G. Shrum

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Ratemaking Philosophy

• Needed revenue estimate is future oriented

• All costs need to be covered

• Internal targets need to be satisfied

• Optimal growth in targeted areas

• Steady, non-disruptive, rate actions

• Rate change is one of several levers to address unfavorable results.

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Unique Small Package Issues

• Expansive collection of coverages – changing conditions– creative interpretation in unintended ways

• Evolving marketplace

• Indivisible premium

• Rating Parameters

• Loss characteristics

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Unique Small Package Issues

Expansive Coverages• $25,000 Accounts Receivable• $25,000 Sewer/Drain Back-up• $1000 Antennae & Satellite• Business Inc. -actual loss

sustained• $10,000 Debris Removal• $5,000 Deferred Payments• $10,000 Employee Dishonesty• Functional Replacement Cost• Full Coverage Glass• $10,000 Money & Securities• $500,000 Newly Acquired Bldgs.

• $10,000 Off-Premises Power or Water Failure

• $5,000 Patterns, Dies, and Molds• +50% Peak Season Protection• $25,000 Property - Other

Locations• $5,000 Signs - all-risk coverage• $5,000 Tenants Lease Protection• $25,000 Valuable Papers• Premises Liability• Products Liability• $10,000 Medical Expenses

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Unique Small Package Issues

Evolving Marketplace• Store Owners Endt.• New Select Custom Pkg.• Car Wash Program• EPL Coverage Form• Livestock Marketing Program• Recyclers Custom Program• Power or Communications

Failure• Grocers Advantage Endt.• Food Contamination Endt.• Tire Retreading and Siping Form

• New Leisure Camp Program• Mini-Warehouse Coverage Form• Funeral Directors Prop.of Others• Artisans Advantage • Apartment Association Program• Home Business Insurance Plan• Car Wash Direct Deductibles

Form• Auto Services Program• RV Dealers Program• Day Care Center Program

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Unique Small Package Issues

Evolving Marketplace -- Response

• Ear Piercing Liability– Relationship to other classes, underwriting controls, nature of risk

• Physicians Equipment– Bureau loss costs, competitors, relationship to other options

• New Coverage Extensions– Build into base or new optional coverage?

• Credits/Discounts– Does justification continue?

– Verifiable at inception… verifiable after inception

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Unique Small Package Issues

Indivisible Premium• Loss Profile

– Template counts and amounts • by size

• by major (and minor) coverage component.

– Current aggregates and state

• Book Profile– Class, years in business, building ages, protection class, financial

scores, line mix, pricing tier, optional coverage purchases

– Ratable and non-ratable elements.

– Underwriting insights into importance

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Unique Small Package Issues Rating Parameters

• Class – Rate Groups

• Homogeneity

• Underwriting controls

– Relationships between • Territory

– Underlying demographic changes

– More localized exposure patterns

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Unique Small Package Issues

Loss Characteristics -- Trend• Economic Drivers

– Property• Nonresidential Structures Price Index (BEA)

• PPI -- Lumber , Metal Products (BLS)

• Business Durable Equipment (BEA)

– Liability• WC Medical Cost Index (NCCI)

• CPI -- Total Medical, Hospital (BLS)

– General• Core CPI ex Food & Energy (BLS)

• Consumer Confidence Index

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Unique Small Package Issues Loss Characteristics -- Trend

• Bureau– Econometric, internal

– Applicability as to:• size of underlying exposure

• nature of exposure

• mix of inherent coverages

• Peer Competitors– More applicable but unique company characteristics

• Internal Data– Volume

– Mix of inherent coverages

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Unique Small Package Issues Loss Characteristics -- Trend

• Bureau Annual Severity Changes:

Line Yr.1 Yr.2 Yr.3 Yr.4 Yr.5 Fitted

BOP -4.6% 3.9% 2.1% -3.2% 3.4% 0.1%

OL&T -0.4% 3.6% 0.5% 7.4% -6.4% 2.0%

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Unique Small Package Issues Loss Characteristics -- IBNR

• Expectation by Program

• Reconciliation to Financial Reports

• Size of Risk Considerations

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Unique Small Package Issues Loss Characteristics -- IBNR

• Bureau Loss Development Links:

Line 15 to 27 27 to 39 39 to 51 15 to Ult.

BOP Liab. 1.349 1.18 1.077 1.738

OL&T 1.387 1.218 1.089 1.943