Personal Auto Class Plan Development
Midwest Actuarial Forum
Jeff Kucera & Irene Bass
April 29, 2016
Definitions of Classification
Risk classification system –
• A system used to assign risks to groups based upon the expected cost or
benefit of the coverages or services provided. (ASOP No. 12)
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2
Purpose of Classifications for Private
Passenger Auto
Quotes from “Any Room Left for Skimming the Cream?” by Robert
F. Bailey; Proceedings of the Casualty Actuarial Society – 1960; Vol.
XLVII
• “In writing private passenger automobile liability insurance
there has always been a need for underwriters to select the
good business and turn down the poor because the rate
classification systems have never been perfect.”
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3
Why Use Classifications for Private
Passenger Auto
Bailey went on to also explain:
• “in 1953 the bureau companies attempted to meet the competitive
pressure by expanding the three class plan to six or seven classes and
sharply increase the spread of relativities”
• “in 1959 the class plan was expanded again to include merit rating in
the hope that this would improve their competitive position and would
reduce the room for competitors to select the better risks within each
rate class.’
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4
Innovations of the 1990’s and 2000’s
• Predictive Modeling, GLM’s
• Corrects Methodological Flaws
• Does More With Limited Data
• Provides Better Statistical Framework
• Efficiency Gains
• Influx of New Rating Variables
• Credit
• Payment Method
• Tenure with Prior Company
• Homeowner Losses
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5
Predictive Model Advantages
Better utilizes all of the data
Male
Female
Youthful
yYM
yYF
Adult
yAM
yAF
Mature
yMM
yMF
Seniors
ySM
ySF
Generalized linear modeling
creates a web
More complete use of
the data results in better
estimates
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Traditional techniques require data to
be segregated and isolated at the
granular level
• Quickly results in crumbly
cake
Male
Female
Youthful
yYM
yYF
Adult
yAM
yAF
Mature
yMM
yMF
Seniors
ySM
ySF
6
Rating Classification
Year
Estimated
Number of
Rating
Classifications
1960
9
2,688,000
74,000,000
0.04
1990
16
3,145,728,000
189,000,000
16.6
2013
20
2,264,924,160,000
250,000,000
9059
Estimated Rating
Possibilities
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Licensed Motor
Vehicles in the US
Ratio of Rating
Possibilities to
Motor Vehicles
7
So How Has Company Focus Changed
• Definition of Best Risk has gone more from lowest frequency to greater
emphasis on profitability, i.e. it is ok for a group to produce “higher than
average” losses if we have recognized it and priced for it
• Class Plans are critical in helping companies avoid adverse selection
• Companies write a much broader spectrum of business. Preferred,
Standard and Non-Standard have new definitions, if they are used at all
• Great spread in rates for all companies
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8
Why Use Classifications for Private
Passenger Auto
One last quote from Bob Bailey
• “It is probably safe to say that we will never be able to devise
a classification system which will produce a precisely correct
rate for each risk, but we attempt to come as close to this
ideal as is possible and practical.”
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9
Case Study – Allstate’s
Complementary Group Rating (CGR)
How to Evaluate a Rating Plan Innovation
Midwest Actuarial Forum
Irene Bass
April 29, 2016
Steps for Evaluating CGR
Step #1:
Step #2:
Understand
CGR
Apply criteria
to reach an
opinion
11
ASOP 1: Introductory ASOP
Section 1: Overview
“While these ASOPs are binding, they are not the only considerations that affect an actuary’s
work. Other considerations may include legal and regulatory requirements, professional
requirements promulgated by employers or actuarial organizations, evolving actuarial practice, and
the actuary’s own professional judgment informed by the nature of the engagement. The ASOPs
provide a basic framework that is intended to accommodate these additional considerations.”
ASOPs are living
documents
ASOPs follow
practice; they don’t
lead it
12
Steps of the Review Process
Step #1: Understand CGR
Interviewed Allstate Actuaries & Data Engineers
Reviewed
• Internal documentation/presentation
• Data
• Prior public rate filings
• Acceptance testing
13
What CGR Accomplishes
• Enhancement to Allstate's private passenger auto class ratemaking
• Solves a historical problem associated with capping large changes in
rating factors
• Alternative to the judgment actuaries have historically applied
• Not a (new) class system
• Not a change to the rating variables used to calculate policy premium
• CGR can be introduced with or without changes to the underlying
classification ratemaking (loss) model
14
What CGR Accomplishes
Traditional Rating Plan - Rating Factors Example
Territory
1
2
3
Current Rating Factor
1.00
1.20
1.40
Initial Indicated Rating Factor
0.95
1.30
1.10
Proposed Rating Factor
0.99
1.25
1.35
Claims
0
1
2+
Current Rating Factor
1.00
1.10
1.50
Initial Indicated Rating Factor
1.00
1.10
1.60
Proposed Rating Factor
1.00
1.10
1.51
Vehicle Type
Car
Truck
Van
Current Rating Factor
1.00
1.10
1.50
Initial Indicated Rating Factor
1.00
1.30
1.60
Proposed Rating Factor
1.00
1.12
1.60
Base Rate
Statewide
Current
$231.48
Initial Indicated
$223.42
Proposed
$224.02
In the above example, the proposed factors are capped so each individual rating factor is always within
the range that is bounded by the current factor and the initial indicated factor.
15
What CGR Accomplishes
Issue with traditional rating factor selection
• Capping historically applied independently to each rating variable
• Reversals occur due to factor compounding
• A reversal occurs when a policy premium that should increase (decrease)
according to the initial actuarially indicated rating factors, instead
decreases (increases)
16
Issue with Traditional Rating Factor Selection
Risk #
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
Terr.
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
3
3
3
3
3
3
3
3
3
Illustrative Summary of Current, Indicated & Proposed Policy Premiums
Claim
Current
Indicated
Proposed
Indicated
History
Type
Premium
Premium
Premium
Change
0
Car
$231.48
$212.24
$221.78
-8.3%
0
Truck
$254.63
$275.92
$248.39
8.4%
0
Van
$347.22
$339.59
$354.84
-2.2%
1
Car
$254.63
$233.47
$243.95
-8.3%
1
Truck
$280.09
$303.51
$273.23
8.4%
1
Van
$381.94
$373.55
$390.33
-2.2%
2+
Car
$347.22
$339.59
$334.88
-2.2%
2+
Truck
$381.94
$441.47
$375.07
15.6%
2+
Van
$520.83
$543.35
$535.81
4.3%
0
Car
$277.78
$290.44
$280.02
4.6%
0
Truck
$305.56
$377.57
$313.62
23.6%
0
Van
$416.67
$464.70
$448.03
11.5%
1
Car
$305.56
$319.48
$308.02
4.6%
1
Truck
$336.11
$415.33
$344.98
23.6%
1
Van
$458.33
$511.17
$492.84
11.5%
2+
Car
$416.67
$464.70
$422.83
11.5%
2+
Truck
$458.33
$604.11
$473.57
31.8%
2+
Van
$625.00
$743.53
$676.53
19.0%
0
Car
$324.07
$245.76
$302.42
-24.2%
0
Truck
$356.48
$319.48
$338.71
-10.4%
0
Van
$486.11
$393.11
$483.87
-19.1%
1
Car
$356.48
$270.33
$332.66
-24.2%
1
Truck
$392.13
$351.43
$372.58
-10.4%
1
Van
$534.72
$432.53
$532.26
-19.1%
2+
Car
$486.11
$393.21
$456.66
-19.1%
2+
Truck
$534.72
$511.17
$511.46
-4.4%
2+
Van
$729.17
$629.14
$730.65
-13.7%
Average =
$400.00
$400.00
$400.00
0.0%
Proposed
Change
-4.2%
-2.5%
2.2%
-4.2%
-2.4%
2.2%
-3.6%
-1.8%
2.9%
0.8%
2.6%
7.5%
0.8%
2.6%
7.5%
1.5%
3.3%
8.2%
-6.7%
-5.0%
-0.5%
-6.7%
-5.0%
-0.5%
-6.1%
-4.3%
0.2%
0.0%
17
Indicated and proposed premiums reflect off-balance correction. Shaded figures indicate reversals
What CGR Accomplishes
Risk #
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
Illustrative Summary of Current, Indicated & Proposed Policy Premiums
Claim
Current
Indicated
Proposed
Indicated
Terr. History Type
Premium
Premium
Premium
Change
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
3
3
3
3
3
3
3
3
3
0
0
0
1
1
1
2+
2+
2+
0
0
0
1
1
1
2+
2+
2+
0
0
0
1
1
1
2+
2+
2+
Car
Truck
Van
Car
Truck
Van
Car
Truck
Van
Car
Truck
Van
Car
Truck
Van
Car
Truck
Van
Car
Truck
Van
Car
Truck
Van
Car
Truck
Van
Average =
$231.48
$254.63
$347.22
$254.63
$280.09
$381.94
$347.22
$381.94
$520.83
$277.78
$305.56
$416.67
$305.56
$336.11
$458.33
$416.67
$458.33
$625.00
$324.07
$356.48
$486.11
$356.48
$392.13
$534.72
$486.11
$534.72
$729.17
$400.00
$212.24
$275.92
$339.59
$233.47
$303.51
$373.55
$339.59
$441.47
$543.35
$290.44
$377.57
$464.70
$319.48
$415.33
$511.17
$464.70
$604.11
$743.53
$245.76
$319.48
$393.11
$270.33
$351.43
$432.53
$393.21
$511.17
$629.14
$400.00
$221.78
$248.39
$354.84
$243.95
$273.23
$390.33
$334.88
$375.07
$535.81
$280.02
$313.62
$448.03
$308.02
$344.98
$492.84
$422.83
$473.57
$676.53
$302.42
$338.71
$483.87
$332.66
$372.58
$532.26
$456.66
$511.46
$730.65
$400.00
-8.3%
8.4%
-2.2%
-8.3%
8.4%
-2.2%
-2.2%
15.6%
4.3%
4.6%
23.6%
11.5%
4.6%
23.6%
11.5%
11.5%
31.8%
19.0%
-24.2%
-10.4%
-19.1%
-24.2%
-10.4%
-19.1%
-19.1%
-4.4%
-13.7%
0.0%
Proposed
Change
-4.2%
-2.5%
2.2%
-4.2%
-2.4%
2.2%
-3.6%
-1.8%
2.9%
0.8%
2.6%
7.5%
0.8%
2.6%
7.5%
1.5%
3.3%
8.2%
-6.7%
-5.0%
-0.5%
-6.7%
-5.0%
-0.5%
-6.1%
-4.3%
0.2%
0.0%
CGR Factor
1.01
1.04
0.97
1.03
1.04
0.97
1.02
1.03
1.00
1.01
1.00
0.97
1.00
1.00
0.97
1.00
1.00
0.97
1.03
1.01
1.00
1.03
1.00
1.00
1.03
1.00
0.98
____-
Indicated and proposed premiums reflect off-balance correction. Shaded figures indicate reversals
Proposed Change
After-CGR
-3.2%
1.5%
-0.9%
-1.3%
1.5%
-0.9%
-1.6%
1.1%
2.9%
1.8%
2.6%
4.3%
0.8%
2.6%
4.3%
1.5%
3.3%
5.0%
-3.9%
-4.0%
-0.5%
-3.9%
-5.0%
-0.5%
-3.2%
-4.3%
-1.8%
0.0%
18
What CGR Accomplishes
•
The CGR process uses iterative analysis to:
•
Cap large changes in policy premiums
•
Phase-in changes over time
•
Prevent policy premium reversals
•
Allow continual re-estimation
•
There is no unique solution - policy premium changes can be capped many different ways
•
CGR process only considers actuarially sound solutions that also meet business constraints
•
The solution chosen from within that subset is the one with the highest probability of renewal for
Allstate's book of business as a whole
•
Retention of Allstate's book of business is not the primary driver of the CGR process--it is simply the
"tie breaker" to select from among multiple solutions
•
In short, CGR is an improved, systematic approach for doing what actuaries--with approval from
regulators--have been doing for decades based solely on judgment
19
How CGR Affects Policy Premium
Two important goals of ratemaking:
1) Responsiveness and
2) Stability
CGR reduces the size of large changes
CGR ensures all changes are in the direction of the actuarially indicated
premium
CGR is neutral to the filed rate level
20
Step #2: Apply Criteria to Reach an Opinion
Law &
Regulations
Current
Events
Literature
Ratemaking
Principles
Actuarial
Standards of
Practice
21
Law
Not excessive, inadequate or unfairly discriminatory
Disallowed rating variables
Disallowed expenses
Prescribed techniques
Proscribed techniques
22
CGR and Ratemaking Principles
• Principle 1: A rate is an estimate of the expected value of future costs
• Principle 2: A rate provides for all costs associated with the transfer of risks
• Principle 3: A rate provides for the costs associated with an individual risk transfer*
• Principle 4: A rate is reasonable and not excessive, inadequate or unfairly discriminatory if
it is an actuarially sound estimate of the expected value of all future costs associated with
an individual risk transfer
* In other words, the goal of ratemaking is to find that premium which most closely reflects the expected costs
of the individual insured. Hence, there is nothing intrinsically wrong or inappropriate about making adjustments
to premiums at the “granular” level
23
CGR and ASOP 12: Risk Classification
Section 3.2.1
Section 3.2.1
Section 3.2.3
Related to expected outcomes
Interdependence of risk characteristics
Objective
Section 3.2.4
Section 3.2.5
Section 3.3.3
Section 3.2.6
Section 3.3.2 (a)
Section 3.3.2(b)
Section 3.3.4
Section 3.4.3
Section 3.6
Practical
Limitations of the law
Comply with applicable law
Industry practices
Adverse selection / homogeneity
Credibility
Reasonableness of results
Testing
ASOP 41 – Communications and documentation
24
Literature
Peer reviewed literature (Variance, Proceedings)
Other CAS Publications
CAS meeting/seminar presentations
Other scholarly papers
NAIC reports
Business publications – current events
25
CGR and Price Optimization
CGR advances current practices and does not possess key characteristics
often associated with price optimization
• CGR is cost based
• CGR does not identify the highest possible premium a policyholder will
accept
• CGR continues the historical process of capping large premium changes,
but does it in a more systematic and objective manner
• CGR does not seek to maximize profits
• CGR is revenue neutral
26
Summary Opinion of CGR
Is cost based and consistent with the Ratemaking Principles
Complies with relevant portions of the Actuarial Standards of
Practice (“ASOP”), in particular ASOP 12
Meets regulatory requirements -- not excessive, not
inadequate, and not unfairly discriminatory
Does not possess characteristics often associated with price
optimization
27
Contact Information
Jeff Kucera – Consultant and Actuary
847-440-2204
jkucera@e2value.com
www.e2value.com
Irene K. Bass, FCAS – Consulting Actuary,
Bass & Khury, Inc.
1930 Village Center Circle
Las Vegas, NV 89134
Phone: 702 580 5954
Email: Ortlinde@aol.com