COM-2
PRODUCT DEVELOPMENT
CAS Ratemaking Seminar, New Orleans
March 11, 2005
Dave McLaughry, FCAS, MAAA
Senior Actuary and Product Manager
Farmers Insurance Group
Entering New Personal Lines
Markets
• Expanding into a new state
• Launching a new product line
• Entering a new distribution channel
Outline
• The challenges
• Laying the groundwork
•
•
•
•
Claims/Underwriting/Marketing
Pricing/Reserving
Implementation
Tracking Early Experience
Entering New Markets - The
Challenges:
• Lack of applicable premium/loss
experience
• Untested data collection processes
• Weak understanding of competition
• Nonexistent/immature claims
organization
• Underwriters inexperienced in the new
market
Entering New Markets - The
Challenges (cont.):
• Lack of familiarity with product nuances
• Local peculiarities: legal venue, weather,
construction practices, etc.
• New regulatory environment!
• Knowledge gained from other markets is
easy to misapply
Laying the Groundwork
• Build a model including all costs, allow
for contingencies
• Develop clear expectations and
reasonable timeframes
• Test using pilot program before making
large investment
• Build processes for accurate data
collection
• Measure everything
You mean we have to pay
Claims?
• Major cause of poor early performance indemnity and expense
• Build staff in-house or outsource?
• Experienced staff and market-specific
knowledge is key
• Establish clear standards of performance
early on
• Document retrieval process
$ Costs per EP
Contribution of Claims Organization to Loss and
LAE Costs
In-house
Adjusters
In-house Legal
Tim e =>
LAE Costs
Loss Costs
Underwriting - Friend or Foe?
• Staff adequately; allow for low efficiency
early on
• Keep a firewall between underwriting
and marketing
• Be generous with investigative reports you need all the help you can get
• Fully research market specific
requirements
$ Costs per EP
Underwriting Costs and Loss Ratio Impact
Start-up
Developing
Expertise
Refining
Processes
Long-term
efficiencies
Tim e =>
UW Costs
Loss Ratio
Marketing with Restraint
• Know what your target market is
• Don’t sell on price
• Overly aggressive sales goals are a recipe
for failure
• Cap production to stay in line with u/w,
claims capacity
• Beware of the underwriting cycle!
Pricing in a Partial Vacuum
• Experience from similar markets may be
considered, if applicable
• If you have no historical experience Why not use competitor data to set rates?
The Perils of Competitor Rates
What could go wrong?
•
•
•
•
Credit models
Underwriting
Black box tiering
Driver assignment
•
•
•
•
Customer base
Contract differences
Product bundles
Data validation
The Perils of Competitor Rates
(cont.)
• Are they able to grow and make money?
• How closely can you mirror a responsible
competitor?
• Be at least as sophisticated as they are its their neighborhood!
• High conversion rates are a leading
indicator of trouble ahead
Reserving in a Total Vacuum
• Use pegged loss ratios to start with
• Key considerations as experience unfolds
–
–
–
–
Earned premium growth pattern
Stated claims procedures
Maturation of claims organization
Market peculiarities (reporting patterns,
severity, tort thresholds, UM statutes)
– Applicability of related markets
– Reserve-to-paid ratios
• Take the heat for high IBNR loads
Implementation - taking the
plunge...
• Have an exit plan - avoid the Roach
Motel syndrome
• Have a plan to revise rates before
experience is available
• If possible, pilot on a small scale first
– Utilize manual processes
– File and use state
– Limited distribution
Tracking Early Experience
• Ignore calendar period results
• Understand growth patterns
–
–
–
–
–
–
Earned premium
Reported claims
Paid Severity
Case reserves
Front-loaded expenses (commissions)
Costs that lag (residual market, LAE, some
taxes)
– Accounting practices for O.A. and G.E. vary
Early Results: Sample
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Year
92
171
240
300
353
400
442
480
514
545
574
600
4,711
0
0
0
0
0
0
77
142
200
250
294
333
1,296
Written Car Years
46
86
120
150
177
200
259
311
357
397
434
467
3,004
Earned Car Years
4
15
32
54
82
113
147
184
223
263
305
349
1,770
Written Premium
36,658
68,137
95,631
119,538
140,657
159,385
206,562
247,844
284,224
316,430
345,522
371,434
2,392,022
Earned Premium
3,055
11,788
25,435
43,366
65,049
90,052
117,493
146,627
177,319
209,443
242,922
277,665
1,410,214
543
2,807
7,551
14,817
24,419
36,152
49,737
64,811
81,109
98,508
116,946
136,381
633,781
NB Policies
Renewal Policies
Reported Losses
Reported Loss Ratio
IBNR @ 75% L/R
IBNR Factor
6 month policies
Renewal rate = 83%
Ave. Annual Premium = 797
44.9%
423,879
1.67
Tracking Early Experience
(cont.)
• Track semi-reliable early indicators
– PD frequency/industry severity
– # claims/$1,000 premium
– Short-tailed coverages (PD, coll, PIP)
• Impact of “new business penalty”
• Skewed distribution of early customer
base
Early Results: Sample
Jan
Segment A
70% of population, 54% of buyers
Renewal Rate = 88%
LR = 72%
Ave Prem = 760
NB Policies
Renewal Policies
Written Car Years
Earned Car Years
Written Premium
Earned Premium
Reported Losses
Earned Premium %
50
0
25
2
18,825
1,569
261
51%
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Year
92
0
46
8
34,989
6,053
1,350
51%
129
0
65
17
49,108
13,061
3,631
51%
162
0
81
29
61,385
22,269
7,126
51%
190
0
95
44
72,229
33,403
11,744
51%
215
0
108
61
81,846
46,243
17,386
51%
238
44
141
79
107,044
60,415
23,934
51%
258
81
170
99
129,078
75,608
31,244
52%
277
114
195
121
148,488
91,730
39,208
52%
293
142
218
143
165,660
108,701
47,768
52%
309
168
238
166
181,159
126,468
56,890
52%
323
190
257
191
194,962
144,972
66,547
52%
2,537
739
1,638
961
1,244,772
730,493
307,089
52%
79
0
39
7
33,148
5,735
1,457
49%
111
0
55
15
46,523
12,374
3,919
49%
138
0
69
25
58,154
21,097
7,691
49%
163
0
81
38
68,428
31,645
12,675
49%
185
0
92
52
77,538
43,809
18,765
49%
204
33
118
68
99,518
57,078
25,803
49%
222
61
141
85
118,767
71,020
33,567
48%
237
86
162
102
135,736
85,589
41,901
48%
252
107
179
120
150,770
100,741
50,740
48%
265
126
196
139
164,363
116,454
60,057
48%
277
143
210
158
176,472
132,693
69,834
48%
2,174
557
1,366
809
1,147,250
679,721
326,692
48%
Segment B
30% of population, 46% of buyers
Renewal Rate = 78%
LR = 82%
Ave Prem = 840
NB Policies
Renewal Policies
Written Car Years
Earned Car Years
Written Premium
Earned Premium
Reported Losses
Earned Premium %
42
0
21
2
17,834
1,486
282
49%
Entering New Markets Measuring Success
• Identify which metrics are reliable
• Measure vs. model, not traditional
financial indicators
• Exceeding early growth goals is usually a
bad sign
Questions??