PERSONAL LINES RATEMAKING –WHAT’S DOWN THE ROAD?

Midwest Actuarial Forum – September 21, 2007Jeffrey L. Kucera, FCAS, MAAA – Sr. ConsultantEMB America LLC

Agenda

•History

•Developments

•Predictions

•Summary

•Questions

Quick HistoryRecent DevelopmentsPredictionsSummaryQuestions

Quick History

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile (50s – 90s)– Tendency to follow ISO or major writer– Class plan expansion in late 60s and early

70s– Easy to obtain competitor information– Company rating plans were well known

Quick History

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile (Late 90s)– Tiering became the fad– Use of multiple companies– Credit introduced by some of the major

players– Rethinking of information sharing

Quick History

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile (2000s)– Credit used extensively– Multivariate analysis use spreading– Companies looking to expand market– “Black Box” pricing becoming more

common place

Quick History

•History

•Developments

•Predictions

•Summary

•Questions

Homeowners (50s – 90s)– Tendency to follow ISO or major writer– Easy to obtain competitor information– Company rating plans were well known– Rating focused on the dwelling– Little innovation

Quick History

•History

•Developments

•Predictions

•Summary

•Questions

Homeowners (Late 90s)– Rethinking of information sharing– Innovation still lagging private passenger

auto– A few companies beginning to think about

credit and prior losses for rating—but it is very limited

– Major emphasis still on dwelling, not occupants

Quick History

•History

•Developments

•Predictions

•Summary

•Questions

Homeowners (2000s)– Credit and prior losses used extensively– Rating by age extended to other end of

spectrum– Multivariate analysis use spreading, but

well behind private passenger automobile– Some additional expansions of rating

variables– Major concerns continues to be catastrophe

exposure

Recent Developments

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile– Multivariate analysis commonplace for

large and medium sized companies– No longer ‘common’ rating plans, making

rate comparisons a new science– More sophisticated companies considering

life time value– Everyone looking for next “credit”

Recent Developments

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile– Interactions between rating variables

expanding, e.g. credit and age– Manuals becoming “convoluted” to mask

what company is really doing– Territory boundaries and rating seems next

logical step for many

Recent Developments

•History

•Developments

•Predictions

•Summary

•Questions

Homeowners– Multivariate analysis is more commonplace,

but not as wide spread as for automobile– Some companies doing by-peril analysis,

but not necessarily by-peril rating– Rating algorithms are using many more

items related to the occupants of the home– Catastrophe exposure and long-term

profitability still the focus for many companies

Predictions

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile & Homeowners– Things will only get more complicated and

more confusing– Multivariate analysis will be commonplace– Significant changes to territory definitions

is around the corner, and on a coverage or by-peril basis

Predictions

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile & Homeowners– Number of rating variables, and

combination of rating variables, will expand significantly

– Data will be more important/critical than ever

– Biggest winner may be company who unlocks ability to easily get data at time of application

Predictions

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile & Homeowners– Lifetime customer value will find it’s way

indirectly into pricing– Optimized pricing will offer a significant

advantage to early users– These two items will drive retention

modeling to heightened awareness within the industry

Predictions

•History

•Developments

•Predictions

•Summary

•Questions

Private Passenger Automobile – Household Averaging

• Eliminate agent assignment• Recognize users drive more than one car

– Vehicle Symbols• Company customization• Quicker response to newer models

Predictions

•History

•Developments

•Predictions

•Summary

•Questions

Homeowners – By-Peril Rating will become the norm,

instead of the exception– Potentially more changes than auto,

because not as much attention has historically been paid to this line

– Various scoring models will be introduced• Building Construction Score• Fire Protection Score

Summary

•History

•Developments

•Predictions

•Summary

•Questions

Changes over the next several years will be significantMajor impediments to change include:– Information Technology– Management’s willingness to accept

change– Unknown Regulatory Environment

with respect to changes that may be made

Summary

•History

•Developments

•Predictions

•Summary

•Questions

Actuaries need to learn how to drive change– How best to evaluate data– How to present findings and learning

so as to be usable by the organization

Companies that dedicate themselves to change, and develop processes for continued change, will be the biggest winners

QUESTIONS??•History

•Developments

•Predictions

•Summary

•Questions

For information or questions regarding this presentation, please contact Jeff Kucera at:Phone: 312/986-1425 extension 2013Email: jeff.kucera@embamerica.comWebsite: www.embamerica.com

Mission: EMB America seeks to help our clients solve complex problems and identify opportunities by providing the appropriate blend of value-added consulting and state-of-the-art software. In so doing, EMB America strives to develop long-term relationships with clients and to be the consulting firm of choice for the business community.