COM-2 PRODUCT DEVELOPMENT CAS Ratemaking Seminar, Salt Lake City March 13, 2006 Dave McLaughry, FCAS, MAAA AVP and Actuary The Hartford Financial Services 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??