2005 CAS RATEMAKING SEMINAR
Product Development
COM-2
Small Commercial
Businessowners
Dan Carr, FCAS, MAAA
Notes/Caveats
All data and numbers are fictitious
Class and coverage comparisons are either
made up or mixed up, so no company is
represented accurately, including my own
We don’t use all of the suggested rating
methods, and we may use some others not
discussed
2
Background
Proprietary BOP
Mix of composite & divisibly rated
Contributions from
Travelers
St. Paul
Aetna
USF&G
3
Product Development Goals
Attract more customers
– Improve automation & ease of doing business
Update the product
– Core policy form
– Optional coverages
– More adequate/
competitive prices
Expand product offering
– Classes
– Coverages
Integrate two companies’ products
– Minimize disruption
4
Overview
What starts the process
Players
Steps along the way
Pricing the product changes: Examples
Other considerations
5
The Beginning:
Ongoing Product Review
Ease of Doing
Business
• Agent identified
• Internal (actuarial,
product,
operations, IT)
Product Evolution
6
Ease of Doing Business
Actuarial/Product/Underwriting
– Track rating/underwriting criteria
Policy endorsements
Coding claims to appropriate endorsements
– Add new functionality
Predictive modeling
Real time geocoding for territorial strategies
IT
– Clean up/eliminate/replace/understand
legacy coding
7
Ease of Doing Business (cont.)
Operations/Underwriting
– Ensure the right product and
underwriting/operational process is used
based on risk criteria
Customer (Agent and Insured)
– Faster, more intuitive agent processing
– Clearer policy presentation
8
Competitor Comparison: Class
Company
Classification
Barber Shops (Service)
Competitor A
Competitor B
Competitor C
Competitor D
Competitor E
Barber Shops
(Service)
Barber Shops
Barber & Beauty
Shop (Service)
Barber Shop (Retail,
Wholesale, Services)
Barber Shops
(Service)
Beauty Parlors and Hair
Styling Salons (Service)
Beauty Parlors and
Hair Styling Salons
(Service)
Beauty Parlors
Barber & Beauty
Shop (Service)
Beauty Parlor including Nails,
Manicure, or Facial
Shops (Retail,
Wholesale, Services)
Beauty Parlors
(Service)
Business Services NOC - except personal
care (Office)
Business Services NOC - except
personal care (Office)
Service, NOC
(Service)
Carpet, Rug and
Upholstery Cleaning Shop Only
Carpet, Rug &
Upholstery Cleaners
(Contractors)
Computer Repair
Computer Service &
Repair (Service)
Dental Labs (Service)
Dental Laboratories
(Service)
Diaper, Uniform and
Linen Supply
Dental Laboratories
(Service)
Dental Laboratories
Diaper/Uniform/Linen
Service (Service)
Dental Laboratory
(Retail, Wholesale,
Services)
Diaper Cleaning /
Linen Supply (both
Retail, Wholesale,
Services)
Dental Labs (Service)
Diaper Service /
Linen Supply (both
Service)
Names changed, companies switched around, some classes made up.
9
Competitor Comparison: Coverage
PROPERTY COVERAGES
Company
Competitor A
Competitor B
Accounts Receivable
Included in the BPP limit
$x on premises ** $y off premises
$z on premises
Appurtenant Buildings and
Structures
No coverage
No coverage
No coverage
Arson and Theft Reward
$x (not applicable in State X)
No coverage
No coverage
Brands and Labels
No coverage
No coverage
No coverage
x Months Actual Loss Sustained **
y Months Actual Loss Sustained **
Unlimited for 365 days if occurs within
Business Income and Extra
100 feet of premises ** No hour time
Expense (including Civil Authority) Extended Period of Indemnity 30 Days Extended Period of Indemnity of 30
** No hour time period under "period
days, unless a greater number of
period under "period of restoration" **
of restoration" ** Civil Authority - up to
consecutive days is shown in the
Civil Authority - 30 days
three consecutive weeks
Declarations** "Period of Restoration"
begins 72 hours after time of loss **
Civil Authority - up to three
consecutive weeks
No coverage
$x at each location
$y
$x
$x ** Begins 72 hours after time of loss
$x
$x
No coverage
$x
Covered as BPP (causes of loss on
policy apply)
Included as part of BPP (Causes of
loss apply including mechanical
breakdown, electrical arcing, and
change in temperature)
Covered as BPP (Causes of loss on
policy apply)
Debris Removal
x% of Covered Property
x% of Covered Property plus $y
x% of Covered Property plus $y
Definition of Premises
Within x feet of premises
Within x feet of premises
Within x feet of premises
Business Income and Extra
Expense - Newly Acquired
Locations
Business Income from Dependent
Properties (when Business Income
is included)
Claim Data Expense (cost of
preparing inventory and income
statements)
Computer Hardware and Media
Names changed, companies switched around, no actual St. Paul Travelers information.
10
Product Development Timeline
Finalize Product Changes- Coverages, Options, Classes, Rate Structure, Rules
Project Team:
Product/Underwriting
Actuarial
Regulatory
Operations
Claims
Risk Control
Marketing
IT
Training
Rate Analysis / Rate Formulation / Rate Table Creation / Rating Logic
Detailed Business, Operational and System Specifications
Finalize Core Forms / Amendatory Forms Drafts
Other Forms, Rates, Rules, apps, risk control
support and Program Manuals
Business, Claim, & Legal Review
Filing Approvals
Final Materials to Filing/Regulatory
Rate & Form Filings
Prerenewal Window
Systems Support (Program, Testing, Final Implementation)
NB and Renewals
Effective
Training
11
Summarize Core Product Changes
Explain the change
Summarize coverage form changes
Summarize underwriting rule changes
Summarize rating rules & rate structure
Reference point for more detailed
specifications, later:
– Forms/endorsements
– Rating logic, rate application, rate derivation
– Programming logic
12
Timeline
Finalize Product Changes- Coverages, Options, Classes, Rates, Rules
Project Team:
Product/Underwriting
Actuarial
Regulatory
Operations
Claims
Risk Control
Marketing
IT
Training
Rate Analysis / Rate Formulation / Rate Table Creation / Rating Logic
Detailed Business, Operational and System Specifications
Finalize Core Forms / Amendatory Forms Drafts
Other Forms, Rates, Rules, apps, risk control
support and Program Manuals
Business, Claim, & Legal Review
Filing Approvals
Final Materials to Filing/Regulatory
Rate & Form Filings
Prerenewal Window
Systems Support (Program, Testing, Final Implementation)
NB and Renewals
Effective
Training
13
Rate Development
Expand core coverage limits
– Impacts base rates
– Impacts pricing for excess optional coverage
Embed current optional coverages
– Example
Add new rates for new classes
– Examples
14
Rates: Embedding Coverage
Example: First $X of Accounts Receivable
Background
Currently only offered as optional coverage as
Rate x AR Limit
Rate varies by protection & construction
Core BPP coverage will include first $X of AR
>> need to convert exposure base
Optional coverage will be on excess basis
15
Rates: Embedding Coverage
Example: First $X of Accounts Receivable
Steps
1. Evaluate adequacy of current optional AR rates
2. Base rate adjustment
– Don’t give up lost optional coverage
premium
– Account for increased utilization
3. Adjust optional coverage rates (now excess)
16
Accounts Receivable Embedding
Example: Base Rate Adjustment
Total core coverage premium:
Current AR optional coverage premium:
In 1st $X layer :
Base Rate Adjustment – Not Lose Premium
Core coverage premium, policies w/o AR
Frequency adjustment:
$1,000,000
$50,000
$30,000
+3%
$900,000
0.15
Add’l. Rate needed for policies w/o coverage today:
Compared to total core coverage premium:
+0.45%
+ 0.27%
Total base rate adjustment needed:
+ 3.27%
17
Accounts Receivable Embedding
Example: Base Rate Adjustment
Issues
Rate adequacy of optional coverage
Core coverage rate adequacy
Utilization:
– What will frequency/severity be on customers
who did not purchase the coverage
previously?
– How to measure?
18
Rates: New Rates for New Classes
How to Develop New Rates?
Adapt rates from other products
Competition
ISO
Considerations
New business only?
Disruption?
Competitor comparison
19
Example 1: New Split GL/Prop Rates
Adapt from Composite BOP Rate
Composite BOP Rate
Property % of Total Losses
Implied Split Rate
Property
GL
GL Exposure Base
Sales / TIV Ratio
GL Rate on Sales Exposure Base
$50.00 per $100 TIV
60%
$30.00 per $100 TIV
$20.00 per $100 TIV
Sales (per $1,000)
2 : 1 ($1 million sales per
$500K Prop. values)
$10.00 (20 ÷ 2)
20
Example 1: New Split GL/Prop Rates
Adapt from Composite BOP Rate (cont.)
Issues/Considerations
Adequacy of current composite rates
Source for GL Exposure Base / Property
Exposure Base (e.g., Sales / TIV) ratio
Variance of Sales / TIV ratio across
insureds
Definition of GL Exposure base (e.g., How
to define Sales?)
21
Example 2: New Split GL/Prop Rates
Based on ISO Commercial Package Policy
Composite GL Rate:
(ISO Prem/Ops Loss Cost
x Prem/Ops ILF
+ ISO Products Loss Cost
x Products ILF)
x ISO Package Mod
x Coverage Adjustment Factor vs. ISO
x Loss Cost Multiplier
22
Example 2: New Split GL/Prop Rates
Based on ISO Commercial Package Policy
Composite
Building Rate
[ (ISO Group I Loss Cost
x ISO Territory Multiplier
x ISO Protection Type Multiplier
x ISO $250 Deductible Factor)
+ (ISO Group II Loss Cost
x ISO Protection Type Multiplier
x ISO $250 Deductible Factor)
+ (ISO SCOL Loss Cost
x ISO Protection Type Multiplier) ]
x (1 + Theft Factor
+ Coverage Adjustment Factor vs. ISO)
x Loss Cost Multiplier x ISO Package Mod
(Composite BPP rate can be calculated similarly. BII is a different animal.)
23
Example 2: New Split GL/Prop Rates
Base on ISO Commercial Package Policy
Issues/Considerations
Some are same as using ISO loss costs in general
(e.g., ULAE provision)
Coverage differences
Rate basis differences (GL limit, Property base
deductible, etc.)
“a” rates
Specific rates
Territory definition differences
Class definition differences
Exposure base differences
Ability to mimic ISO rating
24
Timeline
Finalize Core Product Changes- Coverages, Options, Classes, Rates, Rules
Finalize Product Expansion Classes, Exposure Base and Product Design
Project Team:
Product/Underwriting
Actuarial
Regulatory
Operations
Claims
Risk Control
Marketing
IT
Training
Rate Analysis / Rate Formulation / Rate Table Creation / Rating Logic
Detailed Business, Operational and System Specifications
Finalize Core Forms / Amendatory Forms Drafts
Other Forms, Rates, Rules, apps, risk control
support and Program Manuals
Business, Claim, & Legal Review
Filing Approvals
Final Materials to Filing/Regulatory
Rate & Form Filings
Prerenewal Window
Systems Support (Program, Testing, Final Implementation)
NB and Renewals
Effective
Training
25
Rates: Other Considerations
Competitive analysis
Rating Specifications for IT
Rate/Rule/Form Filings
Systems testing
26
Other Considerations
Field input
Coverage Forms
Marketing materials
Agent manuals
Claim department impacts
Legal review
Training
– Field office marketing & underwriting staff
– Service centers
– Agents
27
End of Presentation
Dan Carr, FCAS, MAAA
2nd Vice President & Actuary
St. Paul Travelers
dgcarr@spt.com
Discussion & Questions