UK versus US Auto Ratemaking
Panelists:
Moderator:
Mike Brockman
Kevin Kelso
Karen Schmitt
A few interesting features of the
UK market
•
•
•
•
•
•
•
No rate regulation
Dynamic market
Fewer actuaries
Large percent of sales via direct channels
Little industry-wide data available
Different product design
Unlimited liability
Terminology Reference
British
Comprehensive
Third Party Fire & Theft
Third Party Only or TPO
Motor
Tariff
Excess
ABI
ABI Group
Scheme
American
An auto policy covers all claim types (the
coverage is comprehensive)
An auto policy covering only these types of losses
An auto policy for liability only
Auto
Rate or price
Deductible
Association of British Insurers
Car grouping assignment published by ABI
A specific rating plan
Distribution Channels
60%
50%
40%
UK
30%
US
20%
10%
0%
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Ba
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In
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Frequency UK vs. US
12.00%
10.00%
8.00%
UK
US
6.00%
4.00%
2.00%
0.00%
BI
Property Damage
Collision
Severity UK vs. US
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
UK
US
BI
Property Damage
Collision
The US Market - A UK View
Price Regulation and Tied Agencies
•
•
•
•
•
greatly affects ratemaking practice
less freedom to change prices frequently
less freedom to introduce new risk variables
arguably less competitive pressures
net result more profit
The US Market - A UK View
Price Regulation and Tied Agencies
• rating plans designed around regulation
• tiering systems blurs risk variable differences and
interationships
• less active statistical analysis
• transparency of rates and information means more
“followers”
The US Market - A UK View
Cover and limited liability
• rating on vehicle means risk less well defined and
less predictable
• fixed policy limits means less need for reinsurance
The US Market - A UK View
Under which approach is the consumer
better served?
• Balance between good value for consumers and
solvency and profits to insurers
• US system probably gets balance right
• UK system consumers get too good a deal - profits
margins low and solvency risk high
The UK Market -- a US View
Curious Mix of Quaint and Modern
• Change rates willy-nilly
• Catching up on litigation -- moving to
contingency-based legal fees
• External data not available
– Centralized MVRs
– Credit scores
– Loss histories
2.5
2.25
2
1.75
1.5
1.25
1
0.75
0.5
UK
66
71
56
61
46
51
36
41
US
26
31
16
21
Rel. Freq
Collision Frequency : Driver Age
Per Capita Ethanol Consumption
10.0
Litres
per
year
9.0
8.0
7.0
6.0
5.0
UK
US
Alcohol-related Auto Fatalities
5.0
Deaths
per
4.0
3.0
100,000
population
2.0
1.0
0.0
UK
US
Access to data
How has access to data shaped ratemaking
approaches in each market?
Data sources:
– ISO / other statistical databases
– ABI (UK)
– motor vehicle records
– credit information
Access to competitor information
Competitor information including rates is
freely available in the US market due to the
rate regulation.
How has access to competitor information
shaped ratemaking in each market?
Regulation
The UK has no price regulation at all.
In the US, regulatory approval play a large
role in how an insurer goes about setting
rates.
What is the lost/gain to the US market under
current processes?
Distribution
Direct writers made it big in the UK market
much earlier than in the US.
What is the outlook in each market for direct
writers now that Internet sales are in
development?
Automobile Ratemaking in the US and UK
PL-35
CAS Ratemaking Seminar 2001
Las Vegas
Panelists: Mike Brockman and Kevin Kelso
Motor Vehicle Records, Loss History
Reports and Credit Data
•
external data bases are available
• vehicle details accessed from registration number
• addresses from postcode
• socio demographic from postcode
•
industry pooled databases
• CUE claims underwriting exchange
•
Credit history can purchased
• used in pricing
• used for risk selection
• correlations need care
Liability v Physical Damage Loss Mix
UK Differences
•
liability depends on coverage bought
•
personal injury proportions
• 25%-35% comprehensive
• 50% - 65% TPFT
•
frequency and severity
• comp 1% frequency $13,000 severity
• tpft 1.3% frequency $14,500 severity
•
risk factors
• more frequency driven than severity
• large claim propensity varies by cell
• little territorial differences in severity
Unlimited v Limited liability
•
unlimited liability coverage compulsory
•
largest claim to date $19 million
•
cost of future care a big issue
•
large claim identification important
• large claim propensity analyses
• low level excess of loss reinsurance
Vehicle v Driver Cover
•
historically vehicle was covered
•
evolved to driver based coverage
• can drive other vehicles third party only
•
conceptually easier to price
•
only, named, any driver covers
• important relationships between these
• deductibles depend on driver
Uninsured Motorist Cover
•
TP cover mandatory
•
uninsured losses not a big problem
•
Motor Insurers’ Bureau pays losses
•
MIB financed through levies
•
current levies about 2% of premium income
Age of Access to Driving
•
legal minimum age is 17
•
must pass test to gain full licence
•
affordability not a serious problem - yet
•
large supply of insurers quoting
•
most buy TPFT cover, old cars
•
no claims bonus transferable between covers
Regulatory Differences
•
no rate filing, rates changed frequently
•
wide range of rating factors
•
demand pricing becoming more common
• pricing based on price sensitiveness
• some discomfort, unjustified in my opinion
• more sophisticated way of doing what’s always been done
•
new business and renewal pricing
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•
•
•
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no reason to be the same
knowledge of customer differs
expenses differ, both admin and overhead issues
managing the annual premium movement
quotation engine constraints
Demand Pricing
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rating builds in propensity to by at a price
•
insurer can more effectively control margins
•
demand propensity acts as safety net
•
exploits market anomolies with competitive
premiums
•
a win win strategy
Optimal Pricing Strategy
Risk
Premium
Model
PRICE
Renewal
Model
Expenses
Optimisation
Algorithm
Most Loyal
Most Profitable
MOST
VALUABLE
Territory Rating
•
no common practice
•
territory groupings
•
•
•
range from 8 to possibly 50
some use demographic information
relativities range from 1 to 5
•
need to understand correlations between
risk factors
•
Underwriting restrictions by territory
Multi v Single Variable Methodology
•
Multivariate analyses only truly way to
understand risk relationships
•
Very important with correlated variables
•
Modern rating plans have more factors
•
technology changing to allow more
sophisticated analyses
•
Must explain concepts to regulators
Rating Tiers
•
Not a concept in UK
•
No distinction between risk factors
•
However can have specialist products
• to brand segments
• to offer different commissions
• to limit cover i.e different deductibles
• to have different risk relativities
• to be subject to tight underwriting rules
Motor Theft Claim Frequency Trends
Using Insurer Area Classification
Predicted Values
0.06
90%
80%
0.05
70%
0.04
Rating Area
Code
60%
50%
0.03
40%
0.02
Rating Area
Code+Std Err
30%
20%
0.01
10%
0.00
0%
0
2
4
6
8
10 12 14 16 18 20 22
Rating Area Code
Rating Area
Code-Std Err
Motor Theft Claim Frequency Trends
Using RMS Household Theft Hazard Function
Predicted Values
0.06
35%
0.05
30%
Rating Area
Code (1)
25%
0.04
20%
0.03
15%
Rating Area
Code (1)+Std
Err
0.02
10%
0.01
5%
0.00
0%
0
5
10
15
20
25
Rating Area Code (1)
30
35
40
45
Rating Area
Code (1)-Std
Err
Motor Theft Claim Frequency Trends
Theft Hazard Function Allowing for Correlation
Predicted Values
0.050
35%
0.045
30%
0.040
Rating Area Code (1)
25%
Rating Area Code
(1)+Std Err
20%
Rating Area Code
(1)-Std Err
0.035
0.030
15%
0.025
+Rating Area Code
(1)
10%
0.020
+Rating Area Code
(1)+Std Err
5%
0.015
0.010
0%
0
5
10 15 20 25 30 35 40 45 50
Rating Area Code (1)
+Rating Area Code
(1)-Std Err
Competitive Analysis
•
brokers quotation systems are generally
available as competitive tools but ….
• brokers have special deals
• direct response rates not included
•
best measure is demand for products
• conversion and renewal analyses
• allows for brand and distribution channel
Interaction between underwriting,
pricing and marketing
•
risk selection common in UK, although practice
varies
• some quote all risks but high rates for undesirable segments
•
•
•
•
some introduce strict terms
some do not quote
some refer to non standard insurer
direct response may target strategically
•
perception of good and bad varies so still good
supply
•
very important to understand interaction in
direct response
Distribution/ Sources of Business
•
tied agents relatively small part of market
•
•
•
•
•
•
48% independent brokers
7% other intermediary e.g banks and building societies
34% direct response
7% company agents
4% other
source of business and distribition channel is
very predictive
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•
•
•
classification factors only proxies
life style factors help
buying behaviour provides customer information
information available differs by channel