Managing Commercial
Lines Pricing Levels in a
Loss Cost Environment
Lisa Hays
Ohio Casualty Group
Today’s Challenge
Accurate measurement of pricing changes
over time for a book of business
Impact on planned vs. actual results
Production Plan
Loss Ratio Plan
Impact on Rate-level indications (onlevel
factors)
Why is this so difficult?
Blame the Underwriters
The implemented rate change may not be
equal to the filed or intended rate change.
Underwriters have many tools at their
disposal
Access to multiple companies
Schedule rating
Must track change in total price level base rate changes and other rating
factors.
How are pricing changes
tracked today?
Cash-to-cash renewal reports
Policies that renew are matched up to their
expiring terms and premiums are compared
PRO - simple to calculate
PRO - necessary data should be readily
available
PRO - over entire book of business it should
provide an adequate measure of the rate plus
exposure change for a book
How are pricing changes
tracked today?
Cash-to-cash renewal reports (cont.)
PRO - easy for the underwriters to
understand and to implement
CON - on individual policies or small
segments, significant exposure changes will
distort the results
CON - Only renewal business that is retained
is evaluated. Omits new business and lost
renewals.
How are pricing changes
tracked today?
Exposure-adjusted renewal reports
Similar to cash-to-cash reports except that
expiring rates are multiplied by renewing
exposures before being compared to
renewing premium
New Business - somewhat hit-and-miss
Monitor change in company usage,
discretionary credits, etc.
Percent of Loss Cost (PoLC)
Definition - the PoLC is the ratio of the
collected premium to the underlying
bureau loss cost dollars.
Loss Cost Dollars = Loss Costs * Exposures
Which rating factors are included in the
calculation of the underlying loss costs?
Potential Factors to
include in Loss Costs
Increased Limits Factor
Deductible Factor
? Experience Mod
? Package Mod
X Loss Cost Multiplier (LCM)
X Schedule Rating Factor
X Company-specific deviations
Potential Factors to
include in Loss Costs
ILFs and deductible factors should always
be considered part of the loss costs - they
objectively quantify expected losses.
Obviously judgmental factors such as
schedule rating should not be included in
the underlying loss costs.
Potential Factors to
include in Loss Costs
Package mods
If you use rating bureau factors “as is” they
should be included in loss costs.
If you filed a significant deviation from the
rating bureau, the revised mods (or the
difference between filed and suggested)
should be tracked as a deviation to loss costs
and monitored.
Potential Factors to
include in Loss Costs
Experience mod - Although experience
rating plans are considered to be
objective, in practice there are situations
where the use of schedule credit or
company placement may double-count a
risk characteristic underlying the mod.
I prefer to track it as part of the PoLC
statistic, but retain ability to exclude it for
ad hoc analysis.
Potential Factors to
include in Loss Costs
General Rule of Thumb: If the rating
factor is specifically tied to the level of
coverage that you are providing (such as
ILFs) it should be included in the loss
cost.
If the rating factor results from the pricing
actuary’s or the field underwriter’s
judgement, it should be captured in PoLC.
Percent of Loss Cost (PoLC)
The general formula for the PoLC when all
rating factors are multiplicative is:
PoLC = Collected Written Premium
ΣLoss Costs * Exposures
= Σ Loss Costs * Exposures * LCM * OTHR * PKG * SRP * EXPER
Σ Loss Costs * Exposures
The LCM includes the company deviation.
Indexed PoLC
Ideally, to facilitate comparisons through
time, the PoLC is calculated by comparing
the collected written premium for a given
year to loss cost dollars calculated from a
base year.
The calculation is simple assuming:
Loss Costs from the Base Year are accessible
You are able to re-rate current exposures
with the Base Year loss costs.
Indexed PoLC
For Policies written in 1999:
Indexed PoLC1999 = Collected Written Premium1999
Σ Loss Costs Base Year* Exposures1999
Example: If the indexed PoLCs were 90, 97, and
105 for effective years 1998, 1999, and 2000,
the changes in pricing were:
1999 change = (97 / 90) - 1 = +7.8%
2000 change = (105 / 97) - 1 = +8.2%
Indexed PoLC
The +7.8% change for 1999 could be due
to changes in:
Underlying loss costs
Use of company deviations
Schedule rating
Any other rating factor
It is NOT due to a change in exposure
Calculation of Components
Please refer to this section of the paper
for a detailed example for Commercial
Auto of how to calculate the contribution
from each factor to the overall PoLC.
The example also demonstrates how to
handle rating variables that are additive.
Workers’ Compensation
Case Study (Exhibits 2 and 3)
Using PoLC to manage pricing levels
Correlate the PoLC levels with loss
experience
Compute loss ratio and frequency relativities
across PoLC ranges
Use these relativities to distribute the overall
rate indication
Perform further analysis on ranges that
deviate significantly from average.
Workers’ Compensation
Case Study (Exhibits 2 and 3)
This case study assumes that the
underlying loss cost inadequacy or
redundancy is the same across states and
industry segments.
If you disagree with this assumption you
should make appropriate adjustments or
perform the analysis at a lower level of
detail.
Setting Goals and Monitoring
Results
Exhibit 4 shows sample monitoring
reports that can be produced to track
PoLC.
New vs. Renewal business should be
monitored separately.
In this example, no pricing improvement
for new business in 2000 compared to
total in 1999. Renewals increased by
6.7% relative to loss costs.
Setting Goals and Monitoring
Results
Assuming the sample report in Exhibit 4 is
not using indexed loss costs, what should
the 2001 PoLC goal be to achieve a rate
increase of 20% if we file a loss cost
change of +5% effective on 1/1/2001?
88.2% * (1.20 / 1.05) = 100.8%
Setting Goals and Monitoring
Results
The goal of 100.8% could apply to both
new and renewal business.
If you target significant price changes on
your renewal book for selected PoLC
ranges, policy retention across ranges
may not be uniform.
In this case, a renewal price increase
report may be a better monitoring tool.
Setting Goals and Monitoring
Results
Exhibit 5 – based on the Experience Mod
and the policy’s PoLC, develop a Target
Renewal Price Change for each policy.
Include an additional amount for the
overall expected exposure change if you
use a cash-to-cash renewal increase
report.
For all policies that renew, compare the
actual renewal price change to the target.
Setting Goals and Monitoring
Results
Again, this report will be useful at a
countrywide or state level, but can be
distorted at the underwriter or agency
level if exposure changes are significantly
different than the projected average.
Every attempt should be made to produce
exposure-adjusted renewal reports for
detailed reporting.
Caveats
The case studies and examples in the
paper assume that the underlying loss
costs are inadequate or redundant by the
same percentage amount across
states
industry groups
effective years
If this is not so, you need to adjust for
mix shift over time.
Summary
PoLC is a useful tool
Un-indexed it measures the change in usage
of company tiers, schedule credit/debit, etc.
over time.
Indexed also incorporates impact of
underlying loss cost changes.
Can be correlated with loss experience to
develop targeted pricing strategies.