ISO Insurance Services Office of Israel, Ltd. Amot Bituach Building, Building B, 9th floor, Derech Petach Tikva 48, Tel-Aviv 66184, Israel Telephone (972) 3 687 6536, Fax (972) 3 687 6542, E-mail info@iso-israel.co.il, Internet www.iso-israel.co.il Database for the Compulsory Vehicle Insurance in Israel Risk Classification Plan and Proposed Offsets to Tariffs for 2003 March 14, 2003 update Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Table of Contents PART A – RISK CLASSIFICATION PLAN ..................................................................................................... 4 INTRODUCTION AND OVERVIEW ............................................................................................................... 4 SECTION A: PROPOSED ISRAEL CLASSIFICATION PLAN FOR PRIVATE OWNED AUTOMOBILES .................................................................................................................................................. 5 EXECUTIVE SUMMARY ....................................................................................................................................... 5 INTRODUCTION ................................................................................................................................................... 7 PROPOSED CLASSIFICATION PLAN AND FACTORS ............................................................................................... 7 SUPPORT FOR THE VARIABLES INCLUDED IN PROPOSED CLASSIFICATION PLAN ................................................. 8 Age of Driver (Year of Birth) ........................................................................................................................ 8 Driver Gender ............................................................................................................................................... 9 Driver Experience (Years Licensed) ........................................................................................................... 10 Accident History .......................................................................................................................................... 10 Major Conviction History ........................................................................................................................... 10 Air Bags Indicator ....................................................................................................................................... 11 Vehicle Engine Size ..................................................................................................................................... 11 Other Variables Considered, But Not Included in the Proposed Classification System for Israel ............. 12 SUPPORT FOR THE PROPOSED CLASSIFICATION FACTORS ................................................................................. 15 BI Accidents ................................................................................................................................................ 15 Major Convictions....................................................................................................................................... 16 Years Licensed ............................................................................................................................................ 16 Age and Gender .......................................................................................................................................... 16 Consideration of Principal Operator Status ............................................................................................... 17 Air Bag Indicator Indications and Selections ............................................................................................. 17 RATING DISTINCTIONS IN TARIFFS .................................................................................................................... 18 ISRAEL CLASSIFICATION PLAN RATING RULES .................................................................................................. 18 Rule 1 - Introduction - the Included Vehicles ............................................................................................. 18 Rule 2 - Premium Determination ................................................................................................................ 18 Rule 3 - Driver Classification ..................................................................................................................... 19 Rule 4 - Accidents ....................................................................................................................................... 20 Rule 5 - Major Convictions ......................................................................................................................... 20 Rule 6 - Vehicle Specific Factors ................................................................................................................ 20 Rule 7 - Endorsements ................................................................................................................................ 21 SECTION B: PROPOSED ISRAEL CLASSIFICATION PLAN FOR PRIVATE OWNED MOTORCYCLES .............................................................................................................................................. 22 EXECUTIVE SUMMARY ..................................................................................................................................... 22 INTRODUCTION ................................................................................................................................................. 24 PROPOSED CLASSIFICATION PLAN AND FACTORS ............................................................................................. 24 SUPPORT FOR THE VARIABLES INCLUDED IN THE PROPOSED CLASSIFICATION PLAN FOR PRIVATE OWNED MOTORCYCLES ................................................................................................................................................. 24 Other Variables Not Included in the Proposed Classification System for Israel ........................................ 25 RATING DISTINCTIONS IN TARIFFS .................................................................................................................... 25 ISRAEL CLASSIFICATION PLAN RATING RULES .................................................................................................. 26 Rule 1 - Introduction - The Included Motorcycle ........................................................................................ 26 Rule 2 - Premium Determination ................................................................................................................ 26 Rule 3 - Driver Classification ..................................................................................................................... 26 Rule 4 - Accidents ....................................................................................................................................... 28 Rule 5 - Major Convictions ......................................................................................................................... 28 Rule 6 - Endorsements ................................................................................................................................ 28 Page 2 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance SECTION C: PROPOSED ISRAEL CLASSIFICATION PLAN FOR CORPORATE OWNED VEHICLES.......................................................................................................................................................... 29 INTRODUCTION ................................................................................................................................................. 29 PROPOSED CLASSIFICATION PLAN AND FACTORS ............................................................................................. 29 Corporate Owned Automobiles ................................................................................................................... 30 Corporate Owned Motorcycles ................................................................................................................... 30 Trucks (Private and Corporate) .................................................................................................................. 30 Additional Variables ................................................................................................................................... 30 RATING DISTINCTIONS IN TARIFFS .................................................................................................................... 31 APPENDICES ..................................................................................................................................................... 33 BAILEY’S MINIMUM BIAS PROCEDURE ............................................................................................................. 33 INFORMATION ABOUT PRIVATE OWNED AUTOMOBILES – EXHIBITS 1A - 8 ........................................................ 35 PART B - PROPOSED OFFSETS TO 2003 TARIFFS .................................................................................. 36 SECTION A: OFFSETS AND UNDERLYING EXPOSURE DISTRIBUTIONS ........................................ 36 EXECUTIVE SUMMARY ..................................................................................................................................... 36 PRIVATE OWNED AUTOMOBILES ...................................................................................................................... 37 Calculation of Average Rating Factors and Offset ..................................................................................... 37 Underlying Exposure Distributions ............................................................................................................ 37 ENGINE SIZE ..................................................................................................................................................... 39 PRIVATE OWNED MOTORCYCLES ..................................................................................................................... 40 Calculation of Average Rating Factors and Offset ..................................................................................... 40 Underlying Exposure Distributions ............................................................................................................ 40 CORPORATE OWNED AUTOMOBILES ................................................................................................................. 42 Calculation of Average Rating Factors and Offset ..................................................................................... 42 APPENDICES ..................................................................................................................................................... 44 INFORMATION ABOUT OFFSETS AND UNDERLYING EXPOSURE DISTRIBUTIONS – EXHIBITS A1 – A2 .................. 44 Page 3 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A Part A – Risk Classification Plan Introduction and Overview This Risk Classification Plan details the risk variables for the compulsory vehicle insurance, and includes vehicle and driver variables. Example of these variables include dates (such as the issuance and renewal dates of a policy, accidents dates, etc.), driver’s characteristics such as age, gender and driving experience, vehicle characteristics like air bags, and the way the vehicle is used. Currently, in the United States, classification plans for automobile insurance differ by the category of vehicle. For example, private owned and operated automobiles are rated based on the driver characteristics as well as the vehicle characteristics, whereas corporate owned vehicles are rated predominantly on the vehicle characteristics and the specific business use of the vehicle. In the United States these rating schemes have proven to accurately identify and appropriately price the underlying differences in loss potential for each of these different categories of vehicles. The drivers and vehicles are classified into different risk groups, each with its own levels of the risk variables. This part includes the classifications for private owned vehicles for private use (including cars and motorcycles), corporate owned vehicles and vehicles used commercially. This section is divided into several chapters, according to the type of covered vehicle: Section A: Private owned automobiles Section B: Private owned motorcycles Section C: Corporate owned vehicles At the end of the section are several appendices: Bailey’s minimum bias procedure: summary of the methodology given in “Insurance Rates with Minimum Bias” by Robert Bailey that details the methodology used by ISO Israel to compute the classification factors. Information about private owned automobiles: exhibits 1a - 8 (20 exhibits overall) that support chapter A. Page 4 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Section A: Proposed Automobiles Israel Classification Plan Part A - Section A Private Owned Automobiles for Private Owned Executive Summary This section of the document pertains specifically to the proposed Israel classification plan for private owned automobiles, which will become applicable sometime in 2003. The initial classification rating plan that is being proposed was developed based on a combination of Israel driver and accident experience as compiled by the Central Bureau of Statistics, United States NoFault insurance data (No-Fault is the coverage most similar to compulsory automobile insurance in Israel), and information gathered from ISO Israel’s visits to Israeli insurance companies in 2000. Due to the limited availability of Israel automobile experience, the proposed factors have been selected in consideration of possible differences between Israel and the United States; to moderate the initial effects of the new rating structure on individual insureds, and to comply with the Ministry of Finance’s provision that the net premium for each vehicle may not exceed 96% of the Pool’s net premium. As time goes on and Israel insurance experience is compiled in the ISO Israel database, the Israel insurance experience will be analyzed, and revisions to the factors noted below will be proposed, as necessary. Following is a summary of the current versus the proposed classification rating variables, and associated factors, for private owned automobiles in Israel: Age and Gender Female Operators Aged less than 21 Male Operators Aged less than 21 Female Operators Aged 21-24 Male Operators Aged 21-24 Operators Aged 25-49 Operators Aged 50-64 Operators Aged 65-74 Operators Aged 75 & Over Current Factor N/A N/A N/A N/A N/A N/A N/A N/A Proposed Factor (Primary) 1.03 1.05 1.015 1.025 1.00 0.95 0.95 0.95 Years Licensed in Israel Less than 2 years At least 2 but less than 4 years 4 or more years Current Factor N/A N/A N/A Proposed Factor (Additive) +0.05 +0.025 0.00 Number of Accidents 0 or 1 2 3 or More Current Factor N/A N/A N/A Proposed Factor (Additive) +0.00 +0.025 +0.05 Number of Major Convictions 0 1 or More Current Factor N/A N/A Proposed Factor (Additive) +0.00 +0.05 Page 5 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Air Bags Indicator Current Factor There is at least one Air-Bag in the vehicle N/A There are no Air-Bags in the vehicle N/A Proposed Factor (Multiplicative) 0.975 1.00 Vehicle Engine Size Factors Current Factor Vehicle Engines Size in Cubic Centimeters Less than or equal to 1,050 N/A 1,051 – 1,550 N/A 1,551 – 2,050 N/A 2,051 – 3,050 N/A 3,051 or more N/A Proposed Factor (Multiplicative) 1.00 1.00 1.00 1.00 1.00 Additionally, ISO Israel is capturing detail for the following variables through the Israel statistical plan, so that analyses of these variables can be performed in the future, for possible refinement to the initial classification plan for private owned automobiles: Principal vs. Non-Principal Operator Status Driver Marital Status (optional) Presence of Anti-Lock Braking System in Vehicle (optional) Vehicle Weight Number of Operators of Vehicle Model Year of Vehicle Seating Capacity of Vehicle (optional) Education Level (optional) Page 6 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Introduction This section of the document pertains specifically to the proposed Israel classification plan for private owned automobiles, which will become applicable sometime in 2003. The initial classification rating plan that is being proposed was developed based on a combination of Israel driver and accident experience as compiled by the Central Bureau of Statistics, United States NoFault insurance data and information gathered from ISO Israel’s visits to Israeli insurance companies in 2000. Historical Israel insurance experience was not available in time to be included in the initial classification analysis performed by ISO Israel. No-Fault coverage in the United States is the coverage most similar to compulsory automobile insurance in Israel. However, not all states have mandatory No-Fault insurance laws in effect. As a result, analyses based on United States data include experience only from those states which have mandatory No-Fault laws in effect. These states include: Colorado, Delaware, DC, Florida, Kansas, Kentucky, Maryland, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania, Utah, Washington and Hawaii. Due to the limited availability of Israel automobile experience, the proposed factors have been selected in consideration of possible differences between Israel and the United States; to moderate the initial effects of the new rating structure on individual insureds and to comply with the Ministry of Finance’s provision that the net premium for each vehicle may not exceed 96% of the Pool’s net premium. As time goes on and Israel insurance experience is compiled in the ISO Israel database, the Israel insurance experience will be analyzed, and revisions to the factors noted below will be proposed, as necessary. Proposed Classification Plan and Factors Following are the proposed classification rating variables, and associated factors, for private owned automobiles in Israel. Age and Gender Female Operators Aged less than 21 Male Operators Aged less than 21 Female Operators Aged 21-24 Male Operators Aged 21-24 Operators Aged 25-49 Operators Aged 50-64 Operators Aged 65-74 Operators Aged 75 & Over Proposed Factor (Primary) 1.03 1.05 1.015 1.025 1.00 0.95 0.95 0.95 Years Licensed in Israel Less than 2 years At least 2 but less than 4 years 4 or more years Proposed Factor (Additive) +0.05 +0.025 0.00 Page 7 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Number of Accidents 0 or 1 2 3 or More Proposed Factor (Additive) +0.00 +0.025 +0.05 Number of Major Convictions 0 1 or More Proposed Factor (Additive) +0.00 +0.05 Part A - Section A Private Owned Automobiles Air Bags Indicator Proposed Factors (Multiplicative) There is at least one Air-Bag in the vehicle 0.975 There are no Air-Bags in the vehicle 1.00 Vehicle Engine Size Factors Proposed Factor (Multiplicative) Vehicle Engines Size in Cubic Centimeters Less than or equal to 1,050 1.00 1,051 – 1,550 1.00 1,551 – 2,050 1.00 2,051 – 3,050 1.00 3,051 or more 1.00 Thus, the final classification factor for a particular risk would be obtained as follows: (Age and Gender Factor + Years Licensed in Israel Factor + Number of Accidents Factor + Number of Major Convictions Factor) * Air Bags Indicator Factor * Vehicle Engine Size Factor. Further details regarding the classification plan rating rules can be found in the section “Israel Classification Plan Rating Rules for Private Owned Automobiles”. Support for the Variables Included in Proposed Classification Plan As mentioned above, the selection of variables used for the development of the Israel classification plan was based on a combination of Israel driver and accident experience as compiled by the Central Bureau of Statistics, United States No-Fault insurance data (No-Fault insurance coverage in the United States is similar to the type of coverage provided by Israel’s compulsory automobile liability insurance), and information gathered from our visits to Israeli insurance companies in 2000. Following is support for the selection of the variables included in the proposed classification plan for private owned automobiles. Age of Driver (Year of Birth) Exhibits 1A & 1B display Israel accident frequency and accident severity information by driver age, as complied by the Central Bureau of Statistics. As Exhibit 1A illustrates, accident frequency in Israel varies significantly by the age of the driver. Specifically, there is an inverse relationship -- as the age of the driver increases, the corresponding accident frequency decreases. Additionally, as exhibit 1B illustrates, drivers under the age of 18, and drivers over the age of 65, are involved in a greater percentage of total fatal and serious accidents than drivers of other ages. Assuming that the actual costs Page 8 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles of accidents increase with increasing severity, the loss severities resulting from the accidents that drivers of these age groups have will be higher than those associated with drivers of all other ages. Exhibit 1C displays United States personal automobile claim frequency and pure premium No-Fault insurance experience by driver age. As Exhibit 1C illustrates, similar patterns are observed for the United States automobile market for accident frequency and pure premium. That is, accident frequency and pure premium generally decrease as the age of the driver increases, up until the age of 75. At 75 years of age, the experience starts to worsen. It should also be noted that the Israeli insurers we met generally believed that the age of the driver would be the factor that would most influence the loss potential for compulsory coverage. For these reasons, ISO Israel has proposed including driver age in the classification plan for private owned automobiles in Israel, and collecting year of birth of the youngest operator in the statistical plan. Driver Gender Exhibits 2A & 2B display Israel accident frequency and accident severity information by driver gender, as compiled by the Central Bureau of Statistics. As Exhibit 2A illustrates, accident frequency in Israel varies significantly by the gender of the driver. Specifically, Israeli male drivers exhibit much higher accident frequency than Israeli female drivers. Additionally, as exhibit 2B illustrates, Israeli male drivers are involved in a greater percentage of serious and fatal accidents than female drivers are. Assuming that the actual costs of accidents increase with increasing severity, the loss severities resulting from the accidents that male drivers have will be higher than those associated with female drivers. Exhibit 2C displays United States personal automobile claim frequency and pure premium No-Fault insurance experience by driver gender. As Exhibit 2C illustrates, the patterns observed for the United States automobile market are different than those of Israel. That is, in the United States, female drivers exhibit somewhat higher accident frequency and pure premiums than male drivers. Some additional items should be considered with regard to gender. In the United States, gender distinctions are maintained only for youthful drivers (i.e., drivers under the age of 24) for classification rating purposes. This is because gender is expected to have little predictive power at older ages. As Exhibit 2D illustrates, this is not the case with Israel. Significant differences continue to be observed by gender, regardless of the age of the driver. One possible explanation for the observed discrepancy by gender is the percentage of the population licensed to drive by gender. As Exhibit 2E illustrates, females in Israel are much less likely to obtain a driver’s license than males; this is true regardless of age. As a result, it is possible that the observed results by gender are affected by factors other than just the gender of the driver. That is, the select population of females obtaining driver licenses in Israel may have very different characteristics (other than gender) than the population of males obtaining driver licenses in Israel. For example, these females might live in less congested areas, or may use their vehicles less often than the general population of males obtaining driver licenses. As Exhibit 2F illustrates, these are not considerations in the United States, since the percentage of the population licensed to drive is fairly consistent by gender. It should also be noted that the Israeli insurers we met with generally believed that the gender of the driver would be an effective classification variable. Page 9 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles For these reasons, ISO Israel has proposed including driver gender in the classification plan for private owned automobiles in Israel. However, judgment has been applied to the final selected factors, to reflect the differences observed between Israel and United States gender experience. Driver Experience (Years Licensed) Exhibits 3A & 3B display Israel accident frequency and accident severity information by years licensed, as compiled by the Central Bureau of Statistics. It should be noted that the years licensed denoted by the CBS is the years licensed in Israel, and as a result driving experience outside of Israel is not considered. As Exhibit 3A illustrates, accident frequency in Israel varies significantly by the years the driver is licensed. Specifically, there is an inverse relationship -- as the years licensed increases, the corresponding accident frequency decreases. However, as exhibit 3B illustrates, the distribution of the severity of accidents is fairly uniform, regardless of the number of years the driver is licensed. Exhibit 3C displays United States personal automobile claim frequency and pure premium No-Fault insurance experience by years licensed. As Exhibit 3C illustrates, similar patterns are observed for the United States automobile market. That is, accident frequency and pure premium generally decrease as the number of years the driver is licensed increases. It should also be noted that the Israeli insurers we met with generally believed that the length of time an individual was licensed would be a relevant rating factor, particularly for the first few years of licensing. For these reasons, ISO Israel has proposed including years licensed in the classification plan for private owned automobiles in Israel. Accident History ISO Israel did not have sufficient Israeli information on accident history available for analysis. However, in the United States the accident history of the driver has proven to be a very powerful discriminator for personal automobile loss potential. This is illustrated in Exhibit 4, which displays United States personal automobile claim frequency and pure premium No-Fault insurance experience by Bodily Injury Liability accident history. (Bodily Injury Liability accident history reflects the operator’s number of accidents resulting in a Bodily Injury claim within the previous three years) As Exhibit 4 illustrates, the frequency and pure premiums increase significantly with each accident involvement. One thing that should be noted with regard to the United States Bodily Injury Liability accident history is that it reflects only those cases where a driver was proven to be at-fault in the accident, and where a bodily injury occurred. It should be noted that the Israeli insurers we met with also agreed that in concept, the driving record of the vehicle operator would be relevant to rating the risk. For these reasons, ISO Israel has proposed including accident history in the classification plan for private owned automobiles in Israel. Major Conviction History ISO Israel did not have sufficient Israeli information on conviction history available for analysis. However, in the United States the conviction history of the driver has proven to be a very powerful discriminator for personal automobile loss potential. This is illustrated in Exhibit 5, which displays Page 10 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles United States personal automobile claim frequency and pure premium No-Fault insurance experience by conviction history. As Exhibit 5 illustrates, the frequency and pure premiums increase significantly with each occurrence of a conviction. One thing that should be noted with regard to the United States conviction history is that it reflects experience from all convictions – both minor convictions and major convictions. Due to the observed differences by conviction history in the United States experience, ISO Israel has proposed including conviction history in the classification plan for private owned automobiles in Israel. Air Bags Indicator Similar to accident history and conviction history, ISO Israel did not have sufficient Israel information on the presence of air bags in the vehicle available for analysis. However, the personal automobile rating plans in effect in the United States currently include discounts for this variable. In fact in some states, these discounts were initiated by government action prior to the accumulation of experience to support such action, due to the intuitive nature of the expected results. Subsequently, various studies by United States governmental agencies have shown that the presence of air bags in vehicles significantly reduces the resulting injuries to occupants of that vehicle in the event of a collision. The appropriateness of these discounts was further supported by United States insurance experience, which was collected and analyzed, after such discounts were introduced. Exhibit 6 contains United States insurance experience for vehicles equipped with air bags versus vehicles without air bags. As Exhibit 6 illustrates, the experience for vehicles with air bags is considerably lower than the experience for vehicles without air bags. For these reasons, ISO Israel has proposed including the Air Bags Indicator in the classification plan for private owned automobiles in Israel. One item that should be noted is that the No-Fault coverage in effect in the United States differs from the compulsory coverage in effect in Israel in one respect -- the payment of losses to a pedestrian. In the United States, losses to pedestrians are not covered by no-fault coverage; rather they are paid by Bodily Injury Liability coverage, which is compulsory in almost every state. Thus, the experience contained on Exhibit 6 is exclusive of losses paid to pedestrians. Since the injuries suffered by pedestrians would not be affected by the presence of air-bags in the striking vehicle, and since the compulsory coverage in effect in Israel includes payments for losses sustained by pedestrians, the savings due to the presence of air-bags in the vehicle may be slightly lower in Israel than it is in the United States for No-fault coverage. According to the CBS, pedestrians represent 10% of all claimants in Israel for compulsory automobile insurance. Vehicle Engine Size While some studies in Israel have indicated that engine size has an effect on the loss potential of a vehicle for compulsory insurance, ISO Israel has not yet been able to ascertain the insurance experience for vehicle engine size in Israel. Also, since this initial classification plan for compulsory insurance is constrained by the requirement that the maximum tariff can only be 96% of the pool tariff, ISO Israel has had to significantly temper the initial factors included in this class plan. Based on our experience in rating auto coverages in the U.S., ISO Israel believes that the driver characteristics are more significant than engine size in determining loss potential. Thus, ISO Israel has included the engine size parameter in this initial class plan with factors of 1.00 for all engine sizes. In the future, after sufficient experience collected through the Israel statistical plan has been accumulated, ISO Israel will analyze the predictive power this variable provides and change the classification plan accordingly. Page 11 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Other Variables Considered, But Not Included in the Proposed Classification System for Israel ISO Israel has also identified additional variables, which may further refine the classification, and rating of private owned automobiles in Israel. These variables are as follows: Income Potential (i.e., Education Level) Principal vs. Non-Principal Operator Status Driver Marital Status Garaging Location of Risk (i.e., Territory) Anti-Lock Brake Indicator Vehicle Weight Number of Operators of Vehicle Seating Capacity of Vehicle Model Year of Vehicle However, for the reasons noted below, ISO Israel is not proposing the inclusion of these variables in the initial Israel classification plan for private owned automobiles. Rather, ISO Israel is suggesting that detail for some of these variables be captured through the Israel statistical plan, so that future analyses of these variables can be performed. In the future, after sufficient experience collected through the Israel statistical plan has been accumulated, ISO Israel will analyze the additional predictive power these variables provide. If any of these variables is deemed significant in further classifying and rating compulsory automobile risk potential, then ISO Israel will propose including such variables in a future refinement to the Israel classification plan for private owned automobiles. Income Potential (Education Level) While the compulsory automobile coverage in Israel includes coverage for loss of income, there are a few reasons why ISO Israel has not included income potential in the initial classification plan: First and foremost, neither Israel nor United States insurance experience was readily available for analysis by the income potential of the driver. Secondly, it is not clear to what extent the income potential of the rated driver will be a predictor of loss potential due to the fact that the income losses associated with the rated driver represent apparently at most 17.5% of the total paid losses for Israel compulsory automobile coverage. It is a known fact that on average, income losses represent approximately 35% of the total loss payment for the compulsory coverage in Israel. (Source: Payment to claimants of compulsory insurance by Avner.) Furthermore, according to the Central Bureau of Statistics, drivers (that is drivers at the time of the accident) represent only about 50% of all injured parties – that is, passengers and pedestrians together represent the other 50% of the claimants. As a result, information on the income potential of the rated driver is expected to be a good predictor for at most 17.5 % of the total compulsory losses (i.e., the percentage of claims paid to the claimant for which income potential information is available (the rated driver) times the average percentage of losses which are income losses OR 35% x 50% = 17.5 % -- if the driver at the time of the accident is the rated driver). However, the driver at the time of the accident is not always the rated driver. Given the greater number of licensed drivers than registered private automobiles in Israel (by a ratio of about 2 licensee’s per registered private automobile), ISO Israel believes that the actual percentage of income losses that could be attributed to the rated driver would be lower. Page 12 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles For these reasons, ISO Israel will not collect information in the Statistical Plan on the income of the youngest operator. However, since the potential for long term disability type claims exists, ISO Israel will collect information on future income potential of the youngest operator through the statistical plan, so that future analyses of this variable can be performed. For data collection purposes, the education level of the drivers will be used as a proxy for future income potential. Once sufficient information has been collected through the statistical plan, ISO Israel will analyze the use of income potential as a rating variable. Principal Operator Status Sufficient Israel accident experience was not available for analysis by the operator status of the driver (i.e., whether the rated driver is the principal operator of the vehicle or only an occasional operator of the vehicle) Furthermore, analysis of this variable for United States No-Fault experience led to either insignificant or counter-intuitive results. For these reasons ISO Israel has not included principal operator status in the initial classification system for Israel. Driver Marital Status Sufficient Israel accident experience was not available for analysis by the marital status of the driver. While this variable is used in classifying personal automobile risks in the United States, it is used sparingly – that is, marital status distinctions are made only for youthful male operators. Due to the limited amount of data currently available by marital status, and the differences observed for Israel vs. United States gender experience, ISO Israel recommends that marital status not be included in the Israel classification plan at this time. Page 13 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Garaging Location of Risk (Territory) The only Israel accident experience available for analysis in location detail was information based upon the location of the accident and not on garaging location. While distinctions in accident frequency were observed for urban vs. non-urban accident locations, the particular location that a vehicle can or does travel to is not known a priori, and thus cannot be used for risk classification purposes. In the United States, experience has shown that the location of garaging, which is known a priori, is a good predictor of personal automobile loss experience. However, geographic location information is greatly affected by external factors such as population density and current road conditions . Since these external factors are not directly comparable for the United States and Israel, United States territory information is inappropriate for direct use in Israel. As a result, ISO Israel recommends that the location of garaging/territory not be included in the Israel classification plan at this time. Additionally, at the request of the Ministry of Finance and the aforementioned reasoning, ISO Israel will not capture information on the garaging location of the vehicle in the Statistical Plan at this time. Anti-Lock Brake Indicator Sufficient Israel accident experience with distinctions for the presence or absence of an anti-lock braking system was not available for analysis. Furthermore, according to a safety research paper published by General Motors Global Research and Development Operations (Anti-Lock Brake Systems and Risk of Different Types of Crashes in Traffic, 1998) significant decreases in risk were observed only when antilock braking systems were utilized on wet roads. On dry roads there was no observable effect on total crash risk resulting from the use of anti-lock braking systems. Since Israel has a rather dry climate, the effect of anti-lock braking systems on Israel automobile loss potential is questionable. As a result, ISO Israel recommends that the presence of anti-lock braking systems in the vehicle not be included in the Israel classification plan at this time. Vehicle Weight While United States experience has been observed to vary by the weight of the vehicle, sufficient information on the weight of private owned automobiles in Israel is not currently available. As a result, vehicle weight cannot be included in the Israel classification system until this information is readily available to insurers for all private owned vehicles. Number of Operators of the Vehicle The number of operators of the vehicle could be related to the loss potential of each vehicle, since as the number of drivers which have access to a vehicle increases, the potential for that vehicle to be in operation increases, thus increasing the potential exposure for that risk. However, there is currently not enough experience available for Israel or the United States to sufficiently support inclusion of the number of operators of the vehicle in a classification plan for Israel at this time. It should be noted that this variable is not currently used in classifying personal automobile risks in the United States. Page 14 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Seating Capacity of the Vehicle The seating capacity of the vehicle could be related to the loss potential of each vehicle, since as the seating capacity increases, so does the potential for additional passengers in that vehicle, thus increasing the potential exposure for that vehicle. However, there is currently not enough experience available for Israel or the United States to sufficiently support inclusion of the seating capacity of the vehicle in a classification plan for Israel at this time. It should be noted that this variable is not currently used in classifying personal automobile risks in the United States. Model Year While the model year of the vehicle could be related to the loss potential of each vehicle, sufficient experience was not readily available for Israel or the United States to support its inclusion in a classification plan for Israel at this time. However, it should be noted that since vehicle safety devices are present only in the newer model year vehicles, the model year of the vehicle and the presence of safety features are expected to be correlated. Since the presence of air-bags is included in the proposed classification plan, some of the potential differences by the model year of the vehicle may already be accounted for in the proposed classification plan via the inclusion of the air-bag variable. Support for the Proposed Classification Factors For the introduction of the Israel classification rating system, ISO Israel analyzed relevant insurance data from the United States with judgmental adjustments made based on observations of available accident and demographic data from Israel and the United States. In analyzing the United States data ISO Israel used a procedure contained in Robert Bailey’s paper “Insurance Rates with Minimum Bias”, Proceedings of the Casualty Actuarial Society, Volume L. This methodology is particularly appropriate when no risk group has sufficient exposure data to enable determination of its risk factors. The paper suggests how to deal with biases that may develop when the data includes multiple risk factors, and explains how to deal with the interactions and minimize the resulting bias. The methodology described in this paper is the methodology currently used by ISO in analyzing automobile insurance classification data in the United States. Further details of the Bailey’s minimum bias procedure can be found in the appendix. The risk variables which were expected to be affected the most by interactive effects were the 5 driver related variables -- driver age, driver gender, driver years licensed, driver accident history and driver conviction history. As a result, these variables were analyzed using Bailey’s minimum bias procedure, as explained in the appendix. The remaining variables – Air Bags Indicator and Engine Size — are vehicle specific variables, and thus it was assumed that the effects of these characteristics would not be affected by the driver of the vehicle. Exhibit 7A displays the initial indications resulting from Bailey’s minimum bias analysis. Exhibit 7B displays the indications after ISO Israel’s selected surcharges for BI Accidents, Convictions and Years Licensed. For this analysis the base class was selected to be drivers who: were not classified as youthful operators (age less than 24) or senior operators (ages 50 & above) had no accident history had no conviction history have been licensed to drive for at least 4 years Page 15 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles The resulting base class indications for these categories are displayed as 1.00 for the primary factor analyzed (age and gender) and 0.00 for the other variables analyzed (accident history, conviction history and years licensed). The initial indication for a particular class would be obtained by taking the factor displayed for the appropriate age and gender, and adding the factor displayed for the appropriate accident history, conviction history and years licensed. The accident history, conviction history and years licensed variables were chosen to be additive factors to ensure a consistent shekel surcharge/discount for each of these variables, regardless of the age and gender of the driver. This was done because the effects of these factors on the resulting loss potential are assumed to be independent of the age and gender of the driver. ISO Israel has suggested tempering the initial indications for the BI accidents, convictions and years licensed variables for the following reasons: BI Accidents As previously mentioned, BI accident history in the United States reflects only those cases where a driver was proven to be at-fault in an accident, and where a Bodily Injury liability claim was eventually paid. For a Bodily Injury Liability claim to have been paid in a no-fault state, the claimant injuries had to have been severe. Thus, BI accident history in the United States reflects only the most severe accidents, and furthermore, only those accidents where the driver was proven to be at fault. Since Bodily Injury Liability coverage is compulsory in the United States even when No-Fault coverage is in effect, BI accidents can be used as a predictor for No-Fault coverage loss potential. However, this is not the case in Israel. Due to the fact that coverages other than compulsory liability are not mandatory in Israel, the accident history used for classification rating purposes has been chosen to encompass accidents resulting in a claim made through the compulsory automobile liability system. These will include accidents where the driver may or may not have been at-fault, as well as accidents which are much less severe than those considered under the United States BI accident history definition. For these reasons, ISO Israel suggests selecting accident surcharges that are much more moderate than those indicated from the United States experience. Additionally, ISO Israel suggests that surcharges not be applied for the first accident. Specifically, ISO Israel suggests that 2 accidents be assigned an additive surcharge of +0.025, and that 3 or more chargeable accidents be assigned a surcharge of +0.05. Major Convictions In order to moderate the initial effects of the new rating structure on individual insureds, ISO Israel suggests that 1 or more major convictions be assigned an additive surcharge of +0.05. Additionally, ISO Israel suggests that surcharges be applied for major convictions only, where a major conviction is defined as one that results in a driver’s license being confiscated, unless overturned by the court. Years Licensed In the United States, the majority of individuals who will obtain a driver’s license sometime in their lifetime do so at the earliest age possible -- age 17. As a result, years licensed data in the United States is very highly correlated with the age of the driver. In fact, in this initial analysis, years licensed may really be explaining some of the effects attributable to driver age. In Israel, this may not always be the case, since the proposed classification plan for Israel will classify risks based on the years an individual has been licensed to drive in Israel only. For these reasons, ISO Israel suggests selecting years licensed surcharges that are much more moderate than those indicated from the United States experience. Page 16 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Specifically, ISO Israel suggests that the at least 2 but less than 4 years licensed category be assigned a surcharge of +0.025, and that the less than 2 years licensed category be assigned a surcharge of +0.05. In addition to the above reasons, ISO Israel selected the factors so that the plan is in compliance with the Ministry of Finance provision that the net premium for each vehicle may not exceed 96% of the Pool’s net premium. These surcharges will of course be reviewed, and revised if necessary, once sufficient experience has been collected and compiled in the Israel database. Age and Gender The final selections for age and gender reflect consideration of the fact that gender experience in Israel is quite different than gender experience for no-fault coverage in the United States. Specifically, female drivers in Israel exhibit much better experience than male drivers, whereas the opposite is true in the United States. Furthermore, the selected factors have also been tempered to account for the fact that the youthful operator experience included in this study was for unmarried operators only. (In the United States age and gender distinctions are maintained only for unmarried youthful operators) Since an argument can be made that young married operators are more mature for their age than unmarried operators, it is possible that the experience for unmarried youthful operators is slightly higher than youthful operators as a whole. For these reasons, ISO Israel suggests using the selected factors displayed on Exhibit 7C. The driver age and gender factors will of course be reviewed, and revised if necessary, once sufficient experience has been collected and compiled in the Israel database. Consideration of Principal Operator Status In addition to the age and gender of the rated driver, the operator status of the driver (i.e., whether the rated driver is the principal operator of the vehicle versus an occasional operator of the vehicle) may also be related to the loss potential of a particular risk. That is, the operator status may be an indicator of how much the vehicle is actually used by the rated driver, and thus may better distinguish the actual exposure of the rated driver in cases where there are multiple operators of a vehicle. For this reason, ISO Israel performed a second analysis where the operator status of the driver was taken into consideration in addition to the age and gender of the driver. This analysis was performed using the same procedures as described above, with the only difference being that principal operator status information was maintained in addition to the age and gender, for the youthful operators. The results of this analysis are contained in Exhibit 7D. As Exhibit 7D illustrates, the indications including principal operator status were counter-intuitive for youthful male drivers, ages 21-24. That is, the indications for principal operators were lower than those for non-principal operators. If principal operator status was truly an indicator of the exposure of the rated driver, the opposite should have been observed for youthful drivers. Due to the anomalous results observed for No-Fault experience, ISO Israel did not include principal operator status in the initial classification plan for Israel. Page 17 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Air Bag Indicator Indications and Selections Exhibit 8 displays the indicated frequency, pure premium and loss ratio relativities for United States nofault experience for vehicles with air bags to experience for vehicles without air bags. The loss ratios displayed on this exhibit are defined as losses divided by collected premium. The collected premium in this case reflects rating differences for variables contained in the personal automobile class plan currently in effect in the United States. These variables include the driver’s age, the driver’s gender, driver’s experience (i.e., years licensed) and the BI accident and major conviction history of all drivers of the vehicle. While the United States personal automobile class plan for No-Fault coverage also includes rating differentials based on the presence of vehicle air-bags, these rating differentials are not reflected in the collected premium used for this analysis. As Exhibit 8 illustrates, both relativities indicate discounts for vehicles with air-bags. Based on this experience, ISO Israel suggests that the selected factors displayed on Exhibit 8 be used in the initial Israel classification plan. Specifically, ISO Israel suggests selecting a discount of 2.5% for vehicles equipped with an air bag. The vehicle air bag discount will of course be reviewed, and revised if necessary, once sufficient experience has been collected and compiled in the Israel database. Rating Distinctions in Tariffs Currently rating distinctions for several types of vehicles are maintained in the tariff. ISO Israel is proposing that the rating distinctions for the following vehicles continue to be done via the tariff. Vehicle Type Private Vehicles Subclass Private Owned, Used for Driving Lessons Private Owned, Antique Auto Israel Classification Plan Rating Rules Rule 1 - Introduction - the Included Vehicles This section provides the automobile insurance rating rules applying to the following vehicles: 1. Must be private owned. 2. Must be one of the following types of vehicles: Private passenger autos and station wagons. Private field vehicle, commonly referred to as sport utility vehicles or jeeps ("rehev kvishshetach"). Private mini-bus ("autobus zair prati"). Private owned truck (or any other commercial vehicle which is not listed below as noneligible) which weighs less than 4,000 kgs. Throughout these rules, the term "auto" is used to refer to the vehicles listed above. Page 18 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles The following vehicles are not eligible for rating in this section: corporate owned vehicles, motorcycles, taxis, buses (other than private mini-buses), trailers, trucks and any vehicles weighing over 4,000 kilograms. Rule 2 - Premium Determination The premium for each auto is determined as follows: 1. Determine the auto's Driver Classification rating factor according to Rule 3 - Driver Classification. 2. Add the applicable Accidents factor determined in Rule 4 - Accidents to the Driver Classification rating factor determined in Rule 3. 3. Add the applicable Major Convictions factor determined in Rule 5 - Major Convictions to the Driver Classification rating factor determined in Rule 3 and the Accidents factor determined in Rule 4. 4. Refer to Rule 6. to determine the applicable rating factors for: Airbag-equipped autos Engine Size These factors are applied multiplicatively. 5. The premium for each auto is determined by multiplying the base rate by the final classification rating factor determined in steps 2., 3. and 4. above. Rule 3 - Driver Classification 1. For the youngest operator of the auto on a regular basis, determine a rating factor from the table below based on the driver's age, gender and number of years licensed. This factor shall be used for Premium Determination purposes. DRIVER CLASSIFICATION FACTOR TABLE AGE Under 21 21 - 24 25 – 49 50 – 64 MALE 1.05 1.025 1.00 0.95 65+ 0.95 GENDER FEMALE 1.03 1.015 1.00 0.95 YEARS LICENSED YEARS Factor * Less than 2 +0.05 >=2-<4 +0.025 4 or more 0.00 0.95 * Add the Years Licensed factor to the Age/Gender factor to develop the Driver Classification factor. 2. Classification Definitions: Regular Basis, which applies to the “Major Convictions”, “Accidents”, “Age”, “Gender” and “Years Licensed” rating factors, refers to operators who have access to the vehicle and who drive it on a fairly consistent basis. This excludes individuals who drive on particular or rare occasions Age means the age attained on the last birthday for the youngest regular operator. Page 19 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Years Licensed means the number of years the youngest regular operator has been licensed to drive this type of vehicle in Israel. If the month of the year licensed is not known, the years licensed should be calculated by assuming that the driver was licensed on July 1st of that year. That is, the number of years licensed would be calculated by: subtracting the month and year licensed (month would be July in this case) from the effective month and year of the insurance policy and then truncating to whole years. The one exception to this rule is if the year licensed is equal to the effective year of the policy, and the effective month of the policy is anytime from January through June; in this case the years licensed automatically equals 0. For example, If the effective date of a policy is January 15, 2003, and the policyholder obtained his license in 2002, the calculation would be January 2003 minus July 2002, which equals 6 months; truncating to whole years results in 0 years licensed. If the effective date of a policy is March 15, 2003, and the policyholder obtained his license in 2003, the number of years licensed is 0. If the effective date of a policy is January 15, 2003, and the policyholder obtained his license in 1998, the calculation would be January 2003 minus July 1998, which equals 4 years and 6 months; truncating to whole years results in 4 years licensed. 3. Multi-car households: A driver shall not be used to determine the Driver Classification factor on more than one auto owned by the insured, unless there is only one licensed driver in the household. Rule 4 - Accidents The Accidents rating factor is determined based on the number of compulsory liability insurance accidents within the last 3 years. In determining the number of accidents, insurers should include accidents for the last three years for all who drive the vehicle on a regular basis, while operating an automobile. Only accidents that generated a claim under the compulsory automobile liability insurance should be considered. Accidents for both private owned and corporate owned automobiles should be considered. Add the applicable Accidents factor to the Driver Classification rating factor determined in Rule 3. ACCIDENTS rating factors Number of Accidents 0 or 1 2 3 or more Page 20 of 46 Factor 0.00 + 0.025 + 0.05 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles Rule 5 - Major Convictions Major Convictions refers to any conviction that results in license confiscation on its own, unless overturned by the court. In determining the number of major convictions, insurers should include major convictions for the last three years for all who drive the automobile on a regular basis, while operating an automobile. Major convictions for both private owned and corporate owned automobiles should be considered. Add the applicable Major Convictions factor to the Driver Classification rating factor determined in Rule 3. and the Accident rating factor determined in Rule 4. MAJOR CONVICTIONS rating factors Number of Major Convictions 0 1 or more Factor 0.00 + 0.05 Rule 6 - Vehicle Specific Factors 1. Airbag Indicator: Determine the Airbag Indicator Autos rating factor according to whether the auto is equipped with either (1) at least one airbag, or (2) no airbags. This factor is applied multiplicatively in the premium determination process. AIR BAG INDICATOR rating factors Airbag Indicator There is at least one Air-Bag in the vehicle There are no Air-Bags in the vehicle Factor 0.975 1.00 2. Engine Size: Determine the Engine Size in cubic centimeters for Private Owned autos. The factor is applied multiplicatively in the premium determination process. ENGINE SIZE rating factors Vehicle Engine Size in Cubic Centimeters Less than or equal to 1,050 1,051 – 1,550 1,551 – 2,050 2,051 – 3,050 3,051 or more Factor 1.00 1.00 1.00 1.00 1.00 Rule 7 - Endorsements Page 21 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section A Private Owned Automobiles 1. Change in Rated Operator: If during the policy term, there is a change in the rated operator, this would require a change in the policy rating and premium and thus require the reporting of a policy endorsement. 2. Change in Vehicle: If during the policy term, there is a change in the vehicle, this would require a change in the policy rating and premium and thus require the reporting of a policy endorsement. 3. If the rated driver attains a birthday or if anyone who drives the vehicle on a regular basis accumulates accidents/major convictions during the policy term which would result in a different rating classification, an endorsement would not be reported, but these changes would be reflected when a new policy is written or the policy is renewed. Page 22 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section B Private Owned Motorcycles Section B: Proposed Israel Classification Plan for Private Owned Motorcycles Executive Summary This section of the document pertains specifically to the proposed Israel classification plan for private owned motorcycles, which will become applicable sometime in 2003. The initial classification rating plan that is being proposed was developed based on a combination of Israel driver and accident experience as compiled by the Central Bureau of Statistics, United States No-Fault insurance data for personal automobiles (No-Fault is the coverage most similar to compulsory automobile insurance in Israel), and information gathered from ISO Israel’s visits to Israeli insurance companies in 2000. As time goes on and Israel insurance experience is compiled in the ISO Israel database, the Israel insurance experience will be analyzed, and revisions to the factors noted below will be proposed, as necessary. Due to the limited availability of Israel automobile experience, the proposed factors have been selected in consideration of possible differences between Israel and the United States; to moderate the initial effects of the new rating structure on individual insureds, and to comply with the Ministry of Finance’s provision that the net premium for each vehicle may not exceed 96% of the Pool’s net premium. As time goes on and Israel insurance experience is compiled in the ISO Israel database, the Israel insurance experience will be analyzed, and revisions to the factors noted below will be proposed, as necessary. Following is a summary of the current versus the proposed classification rating variables, and associated factors, for private owned motorcycles in Israel: Age and Gender Female Operators Aged less than 21 Male Operators Aged less than 21 Female Operators Aged 21-24 Male Operators Aged 21-24 Operators Aged 25-49 Operators Aged 50-64 Operators Aged 65-74 Operators Aged 75 & Over Current Factor Proposed Factor (Primary) N/A 1.03 N/A 1.05 N/A 1.015 N/A 1.025 N/A 1.00 N/A 0.95 N/A 0.95 N/A 0.95 Years Licensed in Israel Less than 2 years At least 2 but less than 4 years 4 or more years Current Factor N/A N/A N/A Proposed Factor (Additive) +0.05 +0.025 0.00 Number of Accidents 0 or 1 2 3 or More Current Factor N/A N/A N/A Proposed Factor (Additive) +0.00 +0.025 +0.05 Page 23 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Number of Major Convictions 0 1 or More Risk Classification Plan Israeli Compulsory Vehicle Insurance Current Factor N/A N/A Part A - Section B Private Owned Motorcycles Proposed Factor (Additive) +0.00 +0.05 Additionally, ISO Israel is suggesting that detail for some of the following variables be captured through the Israel statistical plan, so that analyses of these variables can be performed in the future, for possible refinement to the initial classification plan for private owned motorcycles. Income Potential (i.e., Education Level) [optional] Principal vs. Non-Principal Operator Status Driver Marital Status (optional) Horsepower (optional) Number of Operators of Vehicle Model Year of Vehicle Page 24 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section B Private Owned Motorcycles Introduction This section of the document pertains specifically to the proposed Israel classification plan for private owned motorcycles. Proposed Classification Plan and Factors Following are the proposed classification rating variables, and associated factors, for private owned motorcycles in Israel: Age and Gender Female Operators Aged less than 21 Male Operators Aged less than 21 Female Operators Aged 21-24 Male Operators Aged 21-24 Operators Aged 25-49 Operators Aged 50-64 Operators Aged 65-74 Operators Aged 75 & Over Proposed Factor (Primary) 1.03 1.05 1.015 1.025 1.00 0.95 0.95 0.95 Years Licensed in Israel Less than 2 years At least 2 but less than 4 years 4 or more years Proposed Factor (Additive) +0.05 +0.025 0.00 Number of Accidents 0 or 1 2 3 or more Proposed Factor (Additive) +0.00 +0.025 +0.05 Number of Major Convictions 0 1 or More Proposed Factor (Additive) +0.00 +0.05 Thus, the final classification factor for a particular risk would be obtained as follows: (Age and Gender Factor + Years Licensed in Israel Factor + Number of Accidents Factor + Number of Major Convictions Factor) Further details regarding the classification plan rating rules can be found in the section “Israel Classification Plan Rating Rules for Private Owned Motorcycles”. Page 25 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section B Private Owned Motorcycles Support for the Variables Included in the Proposed Classification Plan For Private Owned Motorcycles In the United States, No-Fault coverage is not available through the standard automobile market for motorcycle risks. As a result, United States insurance experience for motorcycles was not readily available for analysis. However, ISO Israel believes that with the exception of the presence of airbags, the factors that affect loss potential for private owned automobiles are the same factors that would affect loss potential for private owned motorcycles; air bags are simply not available for motorcycles. Additionally, since engine size is already a factor included in the motorcycle tariffs, there is no need to add it to the class plan for motorcycles. Aside from the exceptions noted above, ISO Israel proposes using the same variables that are used to classify private owned automobiles to classify private owned motorcycles. Other Variables Not Included in the Proposed Classification System for Israel ISO Israel has also identified additional variables that may further refine the classification and rating of private owned motorcycles in Israel. These variables are as follows: Income Potential (i.e., Education Level) Principal vs. Non-Principal Operator Status Driver Marital Status Garaging Location of Risk (i.e., Territory) Horsepower Number of Operators of Vehicle Model Year of Vehicle However, at the present time, there is not enough experience available for either Israel or the United States to sufficiently support their inclusion in a classification plan for motorcycle risks in Israel. As a result, with the exception of income potential and garaging location, ISO Israel has suggested that detail for these variables be captured through the Israel statistical plan, so that future analyses on these variables can be performed. The exclusion of the income potential and garaging location is at the request of the Ministry of Finance. However, since the potential for long term disability type claims exists, ISO Israel will collect information on future income potential of the youngest operator through the statistical plan, so that future analyses of this variable can be performed. For data collection purposes, the education level of the drivers will be used as a proxy for future income potential. In the future, after sufficient experience collected through the Israel statistical plan has been accumulated, ISO Israel will analyze the additional predictive power these variables provide. If any of these variables is deemed significant in further classifying and rating compulsory motorcycle risk potential, then ISO Israel will propose including such variables in a future refinement to the Israel classification plan. Page 26 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section B Private Owned Motorcycles Rating Distinctions in Tariffs Currently rating distinctions for several types of vehicles are maintained in the tariff. ISO Israel is proposing that the rating distinctions for the following vehicles continue to be done via the tariff. Vehicle Type Private Owned Motorcycle Subclass 0-50 CC 51-250 CC 251-500 CC > 500 CC Private Owned, Used for Driving Lessons Private Owned, Antique More than 1 Driver With a Sidecar Israel Classification Plan Rating Rules Rule 1 - Introduction - The Included Motorcycle This section provides the motorcycle insurance rating rules applying to the following types of personally-owned motorcycles: mopeds motorcycles with a side-car all other motorcycles Throughout these rules, the term "motorcycle" is used to refer to the vehicles listed above. Rule 2 - Premium Determination The premium for each motorcycle is determined as follows: 1. Determine the motorcycle's Driver Classification rating factor according to Rule 3. 2. Add the applicable Accidents factor determined in Rule 4. Accidents to the Driver Classification rating factor determined in Rule 3. 3. Add the applicable Major Convictions factor determined in Rule 5. Major Convictions to the Driver Classification rating factor determined in Rule 3 and the Accidents factor determined in Rule 4. 4. The premium for each motorcycle is determined by multiplying the base rate by the final classification rating factor determined in steps 2. and 3. above. Rule 3 - Driver Classification 1. For the youngest regular operator of the motorcycle on a regular basis, determine a rating factor from the table below based on the driver's age, gender, and number of years licensed. This factor shall be used for Premium Determination purposes. Page 27 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section B Private Owned Motorcycles DRIVER CLASSIFICATION FACTOR TABLE Age Less than 21 21 - 24 25 - 49 50 – 64 65+ GENDER Male Female 1.05 1.03 1.025 1.015 1.00 1.00 0.95 0.95 0.95 0.95 YEARS LICENSED Years Factor * <2 +0.05 >=2 - < 4 +0.025 4 or more 0.00 * Add the Years Licensed factor to the Age/Gender factor to develop the Driver Classification factor. 2. Classification Definitions Regular Basis, which applies to the “Major Convictions”, “Accidents”, “Age”, “Gender” and “Years Licensed” rating factors, refers to operators who have access to the vehicle and who drive it on a fairly consistent basis. This excludes individuals who drive on particular or rare occasions. Age means the age attained on the last birthday for the youngest regular operator. Years Licensed means the number of years the youngest regular operator has been licensed to drive this type of vehicle in Israel. If the month of the year licensed is not known, the years licensed should be calculated by assuming that the driver was licensed on July 1st of that year. That is, the number of years licensed would be calculated by: subtracting the month and year licensed (month would be July in this case) from the effective month and year of the insurance policy and then truncating to whole years. The one exception to this rule is if the year licensed is equal to the effective year of the policy, and the effective month of the policy is anytime from January through June; in this case the years licensed automatically equals 0. For example, If the effective date of a policy is January 15, 2003, and the policyholder obtained his license in 2002, the calculation would be January 2003 minus July 2002, which equals 6 months; truncating to whole years results in 0 years licensed. If the effective date of a policy is March 15, 2003, and the policyholder obtained his license in 2003, the number of years licensed is 0. If the effective date of a policy is January 15, 2003, and the policyholder obtained his license in 1998, the calculation would be January 2003 minus July 1998, which equals 4 years and 6 months; truncating to whole years results in 4 years licensed. Page 28 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section B Private Owned Motorcycles 3. Multi-vehicle households A driver shall not be used to determine the Driver Classification factor on more than one motorcycle owned by the insured, unless there is only one licensed driver in the household. Rule 4 - Accidents The Accidents rating factor is determined based on the number of compulsory liability insurance accidents within the last 3 years. In determining the number of accidents, insurers should include accidents for the last three years for all who drive the motorcycle on a regular basis, while operating a motorcycle. Only accidents that generated a claim under the compulsory automobile liability insurance should be considered. Accidents for both private owned and corporate owned motorcycles should be considered. Add the applicable Accidents factor to the Driver Classification rating factor determined in Rule 3. ACCIDENTS rating factors Number of Accidents 0 or 1 2 3 or more Factor 0.00 + 0.025 + 0.05 Rule 5 - Major Convictions Major Convictions refers to any convictions that results in license confiscation on its own, unless overturned by the court. In determining the number of major convictions, insurers should include major convictions for the last three years for all who drive the motorcycle on a regular basis, while operating a motorcycle. Major convictions for both private owned and corporate owned motorcycles should be considered. Add the applicable Major Convictions factor to the Driver Classification rating factor determined in Rule 3. and the Accident rating factor determined in Rule 4. MAJOR CONVICTIONS rating factors Number of Major Convictions 0 1 or more Factor 0.00 + 0.05 Rule 6 - Endorsements 1. Change in Rated Operator: If during the policy term, there is a change in the rated operator, this would require a change in the policy rating and premium and thus require the reporting of a policy endorsement. Page 29 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A - Section B Private Owned Motorcycles 2. Change in Vehicle: If during the policy term, there is a change in the vehicle, this would require a change in the policy rating and premium and thus require the reporting of a policy endorsement. 3. If the rated driver attains a birthday or if anyone who drives the vehicle on a regular basis accumulates accidents/major convictions during the policy term which would result in a different rating classification, an endorsement would not be reported, but these changes would be reflected when new policy is written or renewed. Page 30 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A – Section C Corporate Owned Vehicles Section C: Proposed Israel Classification Plan For Corporate Owned Vehicles Introduction This section of the document pertains specifically to the proposed Israel classification plan for corporate owned vehicles, which will become applicable sometime in 2003. This plan is based on the current system in place in Israel to rate corporate owned vehicles. Proposed Classification Plan and Factors Vehicles in Israel are currently grouped into different categories to allow for rating. The new classification rating plan for corporate owned vehicles will use a similar type of system. All corporate owned vehicles will fall into one of the following categories: Corporate Owned Automobiles Corporate Owned Motorcycles Trucks Taxis Buses Special Vehicles Dealers Trains Unlike non-corporate owned vehicles, corporate owned vehicles will not be rated on any driver characteristics. Instead they will be rated only on the specific vehicle that is being insured. The corporate owned vehicles can not be rated the same as non-corporate owned vehicles because there is generally no specific driver that will be operating the vehicle. IMPORTANT!!! Private owned buses, taxis and trucks will be rated using the factors displayed in this section of the classification plan. Specific driver information is not required. Each vehicle category has different classification rating plan variables and requires different information to be reported to ISO Israel. Each of these vehicle categories corresponds to a different module in the Statistical Plan. Following are the variables and the factors that will be used for each category. In each instance all of the factors for a category are multiplied together and then the result is rounded to three decimal places, using standard rules for rounding. This total factor is then applied to the base rate to produce a final rate for the vehicle being rated. At this time ISO Israel is adding only Air Bags Indicator as a new classification factor. Other new classification variables are all being introduced with a factor of 1.000 and the Used for Driving Lessons factor is being maintained at the current 1.250. Page 31 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A – Section C Corporate Owned Vehicles Corporate Owned Automobiles A corporate owned automobile is a vehicle with four wheels and modest size. This vehicle is normally a car, minivan, sport utility vehicle (SUV) or commercial vehicles which weigh less than 4,000 kgs. Vehicle Use Tourism Drive for Private Purposes Used for Driving Lessons Business (other than tourism/driving lessons) 1.000 1.000 1.250 * 1.000 * Note: The factor for driving lessons is already reflected in the tariffs for corporate owned autos. Air Bags Indicator There is at least one Air-Bag in the vehicle. There are no Air-Bags in the vehicle. 0.975 1.000 Corporate Owned Motorcycles A motorcycle is any two wheeled vehicle that is self-propelled. This vehicle could have a sidecar or not. This category includes mopeds. Vehicle Use Tourism Drive for Private Purposes Business (other than tourism/ driving lessons) 1.000 1.000 1.000 Trucks (Private and Corporate) Standard cargo-carrying vehicles that are generally larger than automobiles. This category includes both single-unit trucks and GORERIM (that which pulls a trailer). Vehicle Type Truck GORER (Pulls the Trailer) 1.000 1.000 Additional Variables There are three additional variables that are widely used in the US. These factors have been shown to be very useful in rating risks in the US. While it is believed that these factors will be very useful to rating vehicles in Israel, the factors can not be selected currently. They can’t be selected until after sufficient Israel-only data is available. These three variables are: postal code, fleet indicator and radius of use. The postal code is used to identify the location of the principle garaging of a vehicle. This is probably the most important single variable used in the rating of corporate owned vehicles in the US. Page 32 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A – Section C Corporate Owned Vehicles The fleet indicator identifies a vehicle that is a member of a fleet of 5 or more vehicles. In the US it has been shown that there is a difference in experience between vehicles that are part of a fleet versus those that are not. Radius of use might be an important variable for which data will be collected from Israel. For corporate owned motorcycles, horsepower information will be collected but not rated on at this time. Please note that these variables might not be used at all in Israel if the Israel-specific experience shows that there is no difference between rating different risks. Rating Distinctions in Tariffs Currently rating distinctions for several types of vehicles are maintained in the tariff. ISO Israel is proposing that the rating distinctions for the following vehicles continue to be done via the tariff. Vehicle Type Private Vehicles Subclass Corporate Owned, Used for Driving Lessons Corporate Owned, Antique Corporate Owned, Rented < 1 Year Corporate Owned, Rented >= 1 Year Corporate Owned, Rental Fleet (> 400 vehicles) Corporate Owned Motorcycles 0 – 50 CC 51 – 250 CC 251 – 500 CC > 500 CC More than 1 Driver Used for Driving Lessons With a Sidecar Antique Rented < 1 Year Rented >=1 Year Dealerships Cars Motorcycles Policy issued for more than one named driver Policy issued for more than one commercial plate Driving of an additional person for presentations Buses Private 1-15 Passengers Private 16-20 Passengers Private 21+ Passengers Public 1-20 Passengers Public (touring & others) 21+ Passengers Public (licensed lines) 21+ Passengers Page 33 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A – Section C Corporate Owned Vehicles Taxis 1-6 Passengers 7+ Passengers Used for Touring Policy for 1 Driver Commercial Vehicles <= 4 Tons > 4 Tons Other Commercial Vehicles Used for Driving Lessons Desert/Special Desert Bending Truck Truck with Crane Hazardous Material Antique Rented for >= 90 Days Rented for < 90 Days Special Vehicles Supported Vehicle Supported Bending Supported for Transporting Fuel, Gas, Inflammable or Exploding Materials Engineering Equipment Ambulance Fire Truck Hearse Street Sweeper Kalnoa/Ravnoa/Golf Cart Trailer for Tractor Bending Trailer for Tractor Agriculture and Forestry Vehicle Tractor for Other Activities Tractoron, Tractoron 6x6 Tractoron, Tractoron 6x6, Rented Trailer Trailer, Bending Trailer for Transporting Fuel, Gas, Inflammable or Exploding Materials All Other Vehicles Page 34 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A – Appendices Appendices Bailey’s Minimum Bias Procedure BAILEY’S MINIMUM BIAS PROCEDURE for Israel Private Owned Vehicles Classification Plan To increase the credibility of the results, the age and gender classifications can be grouped according to major convictions, years licensed and accident classifications. This produces larger groups with correspondingly more reliable class indications than if all of the subdivisions had been done simultaneously. Using the procedure developed by R.A. Bailey in “Insurance Rates with Minimum Bias” (Proceedings of Casualty Actuarial Society, Volume L) these factors, surcharges and discounts were fitted to an additive model. The Minimum Bias procedure is needed to ensure that the net adjustment for any of the smaller classes formed by this categorization is also done properly. This method uses the larger groupings for credibility, but also reflects the indications for the smaller classes. The resulting indication for the individual classes is unbiased in the aggregate and has the minimum-possible bias for the subdivisions. These estimates can thus be qualified as those that fit the data most closely. Each age and gender classification is subdivided into major convictions, years licensed and accident categories producing 144 groups of classes for drivers: For each of the 8 age and gender classifications there are 2 major convictions classifications, 3 years licensed classifications and 3 accident classifications. For each of these classifications, a combined indication based on actual exposures and losses is developed. Also, a rating factor for each of the aggregate groupings is developed: one for each age and gender classification, one for each major conviction classification, one for each years licensed classification and one for each accident classification. Using this method, the average difference between the estimated relativities and the data for one of the types of classifications is set equal to zero and new indicated factors for that type are found, either for an age and gender classification, major convictions, years licensed classification, or an accident classification. This is done for each of the age and gender classifications, major conviction classifications, years licensed classifications and accident classifications. This method is iterative; it continues until a set of estimates is produced which best fits the actual indications. Equations for Minimum Bias Procedure Define rijkl to be the actual indication for the ith age and gender classification, the j th major conviction classification, the kth years licensed classification and the lth accident classification and let wi be the estimated rating factor for the ith age and gender classification, xj be the estimated rating factor for the jth major conviction classification, yk be the estimated rating factor for the kth years licensed classification and zl be the estimated rating factor for the lth accident classification. Also, let nijkl be the actual number of exposures for the class formed by the intersection of the i th age and gender classification, the jth major conviction classification, the kth years licensed classification and the lth accident classification. Page 35 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A – Appendices Then the average difference for the j th major conviction classification equals: all i,k,l nijkl (rijkl - wi -xj - yk - zl) _________________________ all i,k,l nijkl rijkl Upon setting this equation equal to zero, solving for xj yields: all i,k,l nijkl (rijkl – wi – yk – zl) xj = _______________________ all i,k,l nijkl Analogous equations result for wi, yk and zl. “Best Fit” Factors Given Selected Surcharges/Discounts classification The factors and surcharges/discounts resulting from the Bailey's procedure as described are the minimum-bias estimates for the age and gender classification factors, major conviction surcharges, years licensed surcharges and accident history surcharges. However, selections were made from the indications based on consideration of environmental differences between Israel and the United States, and tempering of extreme indications. Therefore, the indicated age and gender factors may no longer provide the “best fit” to classification experience once the selections have been made. It was determined that the indicated age and gender factors and major convictions would change significantly if selections were made for the years licensed and accident surcharges, rather than using the indicated surcharges resulting from application of the Bailey's procedure. Thus, the Bailey’s procedure was rerun with the accident and years licensed surcharges set equal to the selected factors for these variables. Upon reviewing the second run indications, it was determined that the indicated age and gender factors would change significantly if selections were made for the major conviction surcharges and the years licensed and accident surcharges resulting from the application of the Bailey’s. Once these selections have been made, only factors for the age and gender classifications need to be determined. The “best fit” age and gender factors given the selected major convictions surcharges/discounts, years licensed and accident surcharges were determined as follows: Let: Fijkl = the fitted factor resulting from Bailey's minimum-bias procedure for the ith age and gender classification, the jth major conviction classification, the kth years licensed classification and the lth accident classification. nijkl= number of exposures in the i-j-k-lth cell _ xj = the jth selected major conviction surcharge _ yk = the kth selected years licensed surcharge _ zl = the lth selected accident surcharge Page 36 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part A – Appendices Then we find wi’s (age and gender factors) that minimize the weighted least squares fit to the fitted factors Fijkl, i.e., minimize the expression: _ _ _ all i,j,k,l nijkl (Fijkl – wi - xj - yk – zl)2 The wi's that minimize this are given by: _ _ _ wi = all j,k,l nijk (Fijk – xj – yk – zl) / all j,k,l nijkl for each i. These resulting wi's are the “best fit” primary factors given the selected surcharges/discounts x j, yk and zl and are shown in the column labeled “Bailey’s indications” on Exhibit 7B. Information about private owned automobiles – Exhibits 1A - 8 Exhibits 1A - 8 (20 exhibits overall) that support the "Risk Classification Plan" for private owned vehicles. Page 37 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Section A Offsets and Distributions Part B - Proposed Offsets to 2003 Tariffs Section A: Offsets and Underlying Exposure Distributions Executive Summary In order to implement the proposed Israel Compulsory Liability Coverage Vehicle classification plan on a revenue-neutral basis (i.e., to ensure that the total premium collected under the new class plan is identical to the total premium that would have been collected under the old class plan), offsets must be applied to the indicated base rates by vehicle type. Offsets are calculated as the ratio of the old class plan average rating factor divided by the new class plan average rating factor. These offsets are multiplied by the indicated base class rates by vehicle type to derive the final indicated base class rates for use with the new class plan. The resulting offsets by vehicle type are as follows: Vehicle Type Offset Private owned Automobiles Private Owned Motorcycles Corporate Owned Automobiles 1.003 0.980 1.014 Since ISO Israel is not proposing changes to the current classification plan in effect in Israel for other vehicle types at this time (i.e., the class plan for corporate owned motorcycles, trucks, taxis, buses, special vehicles, dealers and trains are not being revised) offsets are not needed for these vehicle types. That is, the offsets for these vehicle types are all 1.000 by default. Details on the calculation of the average rating factors and offsets for each individual vehicle type listed above can be found in the sections that follow. Page 38 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Section A Offsets and Distributions Private Owned Automobiles Calculation of Average Rating Factors and Offset Exhibit A1 displays the exposure distributions and average rating factors for each individual rating variable contained in either the old or new Israel Private Owned Automobile class plans. Ideally, offsets should be calculated by rating each insured vehicle using the old and the new classification systems, and analyzing the difference in premium to be collected under the two systems. However, since ISO Israel did not have a data base containing detailed Israeli information for all variables considered in the old and new class plans readily available for analysis, ISO Israel calculated offsets by determining the average rating factors for each variable separately, and then using the formula below to generate the overall average rating factor: Overall Average Rating Factor = (Age and Gender average rating factor + Years Licensed average rating factor + Number of Accidents average rating factor + Number of Major Convictions average rating factor) x Air Bags Indicator rating factor x Engine Size Rating Factor Variables which were not included in one of the class plans (i.e., either the old or new class plan) were assigned average rating factors of 0 or 1, depending on whether the variable was treated as an additive or multiplicative variable. The offset was then calculated by dividing the overall average rating factor for the old class plan by the overall average rating factor for the new class plan. Exhibit A1 displays the underlying exposure distributions, the average rating factors for the old class plan and the average rating factors for the new class plan for the Private Owned Vehicles rating variables. Based on Exhibit A1: The overall average rating factor for the old class system is calculated as: (1.000 + 0.000 + 0.000 + 0.000) x 1.000 x 1.000 = 1.000. The overall average rating factor for the new class plan is calculated as: (0.998 + 0.010 + 0.000 + 0.003) x 0.986 x 1.000 = 0.997. Thus, the final offset for private owned automobiles is calculated as: 1.000/0.997 = 1.003. It should be noted that ISO Israel used experience from the United States to test the accuracy of this method. That is, ISO Israel calculated sample offsets with United States experience using the 2 methods discussed above – re-rating full detail data versus calculating average rating factors on a variable by variable basis and combining them into a overall average rating factor as described above. The 2 methods produced nearly identical results, supporting the validity of this approach. Underlying Exposure Distributions In calculating the average rating factors and offsets, ISO Israel used experience provided by the Israel Central Bureau of Statistics, the Israel Ministry of Transportation and the Israel Police to derive the Page 39 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Section A Offsets and Distributions underlying exposure distributions. Details on the exposure distribution calculations for each individual variable are provided below. Rated Driver Age and Gender Distribution ISO Israel obtained information on the number of licensed drivers in Israel by age and gender from the Ministry of Transportation (MOT). However, since there are roughly twice as many licensed drivers as there are personal cars in Israel, and since the rating rules underlying the new class plan utilize only the age and gender information of the youngest driver of each vehicle for rating purposes, ISO Israel needed to adjust the licensed driver age and gender distributions obtained from the MOT to represent the distribution of rated drivers for this coverage. Specifically, the licensed driver age and gender distribution obtained from the MOT was assumed to over-represent the percentage of rated adult drivers, since adult operators will not be considered for age and gender rating purposes in those situations where a vehicle is driven by both an adult and a youthful operator (where a youthful operator is defined as an operator under the age of 24). In order to adjust the distribution of adult operators, ISO Israel scaled back the number of licensed drivers between the ages of 25 and 75 by the difference between the total numbers of licensed drivers and the total number of private cars in Israel. This adjustment was applied to the individual age groups (i.e., 25-49, 50-64 and 65–74) based on each age groups’ percentage of the population of drivers between the ages of 25 and 75. The 75 and over age group was not adjusted, as it was assumed that the probability of an adult over the age of 75 sharing a vehicle with a youthful driver would be very small. The original age and gender distribution as well as the adjusted age and gender distribution are displayed on Sheet 1 of Exhibit A1. Years Licensed in Israel Distribution ISO Israel obtained information on the number of licensed drivers in Israel by years licensed from the Ministry of Transportation (MOT). Similar to age and gender, the rating rules underlying the new class plan utilize only the years licensed information of the youngest driver of each vehicle for rating purposes. As a result, ISO Israel adjusted the MOT data to account for the fact that there are more licensed drivers in Israel than private cars to be rated. Similar to age and gender, the distribution obtained from the CBS was assumed to over-represent the percentage of rated adult drivers. However, since not everyone in Israel receives their drivers license at age 17, adult drivers were not directly identifiable from the years licensed distribution. In order to adjust the years licensed distribution, ISO Israel assumed that 10% of the drivers licensed 4 – 8 years were adults which shared a vehicle with a youthful driver, 20% of the drivers licensed 8 – 16 years were adults which shared a vehicle with a youthful driver, and 40% of the drivers licensed 16 or more years were adults which shared a vehicle with a youthful driver. ISO Israel then scaled back the number of drivers assumed to be adults sharing a vehicle with a youthful operator in these years licensed categories by the difference between the total number of licensed drivers and the total number of private cars in Israel. This adjustment was applied to the individual years licensed groups based on their percentage of the total population assumed to be adult drivers sharing a vehicle with a youthful operator. The original years licensed distribution obtained from the CBS as well as the adjusted years licensed distribution are displayed on Sheet 2 of Exhibit A1. Page 40 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Section A Offsets and Distributions Number of Accidents Distribution Since accident history information was not readily available on a vehicle basis from the Israel Police, ISO Israel used accident frequency information obtained from the Central Bureau of Statistics to estimate the distribution for this variable. According to the CBS, the 2001 personal injury accident frequency for private cars in Israel was 1.53%. Assuming that the distribution of accidents over a three year period can be estimated via the Poisson distribution with a parameter of 0.0459 (.0153 x 3): the probability of not being in an accident in a three year period is 95.51%, the probability of being in one accident in a three year period is = 4.38%, the probability of being in two accidents in a three year period is = 0.10% and the probability of being in three or more accidents in a three year period is = 0.01%. This distribution is displayed on Sheet 3 of Exhibit A1. Number of Major Convictions Distribution Since major conviction history information was not readily available on a vehicle basis from the Israel Police, ISO Israel used conviction frequency information obtained from the Israel Police to estimate the distribution for this variable. According to the Israel Police, there were 1,400,000 total convictions in Israel in 2001. Since information was not readily available on the number of major vs. minor convictions, ISO Israel used the ratio of major convictions to total convictions from the United States (major convictions represent 3% of total convictions in the United States) to estimate the number of major convictions in Israel. Thus, the total number of major convictions in Israel for 2001 was estimated to be 42,000 (1,400,000 x .03). Since these convictions represent convictions for all vehicle types, and there are 1,968,605 total vehicles in Israel (per the Ministry of Transportation), the probability of a vehicle being issued a major conviction in a given year is 2.13%. Assuming that the distribution of major convictions over a three year period can be estimated via the Poisson distribution with a parameter of .0639 (.0213 x 3): the probability of a vehicle not being issued a major conviction in a three year period is 93.81%, and the probability of a vehicle being issued one or more major convictions in a three year period is 6.19% (.0619 = 1 – .9381). This distribution is displayed on Sheet 4 of Exhibit A1. Air Bags Indicator Distribution The distribution of vehicles in Israel with air-bags was estimated based on the distribution of private cars in Israel (latest model year in the file is model year 2002) obtained from the Ministry of Transportation and the assumption that airbags were used as of Model Year 1997 in Israel. The distribution of private cars by model year (and by the associated age distribution, where age is defined as the calendar year + 1 minus the model year) is displayed on Sheet 5 of Exhibit A1. Assuming that the Israeli private car age distribution remains fairly constant over time, in 2003 model year 1997 and newer vehicles will represent vehicles aged 0 – 7. Based on the Israeli age distribution displayed on Sheet 5 of Exhibit A1, approximately 56.11% of the Israeli vehicles on the road are aged 0 – 7. Thus, in 2003 approximately 56.11% of the cars on the road will be model year 1997 or newer, and will have air-bags. This distribution is displayed on Sheet 5 of Exhibit A1. Engine Size Since the engine size parameter in the initial class plan is being introduced strictly with 1.00 factors for all engine size classes, the average rating factor is 1.00 by default. Page 41 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Section A Offsets and Distributions Private Owned Motorcycles Calculation of Average Rating Factors and Offset Exhibit A2 displays the exposure distributions and average rating factors for each individual rating variable contained in either the old or new Israel Private Owned Motorcycle class plans. Ideally, offsets should be calculated by rating each insured vehicle using the old and the new classification systems, and analyzing the difference in premium to be collected under the two systems. However, since ISO Israel did not have a data base containing detailed information for all variables considered in the old and new class plans readily available for analysis, ISO Israel calculated offsets by determining the average rating factors for each variable separately, and then using the formula below to generate the overall average rating factor: Overall Average Rating Factor = (Age and Gender average rating factor + Years Licensed average rating factor + Number of Accidents average rating factor + Number of Major Convictions average rating factor). Variables which were not included in one of the class plans (i.e., either the old or new class plan) were assigned average rating factors of 0 (additive variable). The offset was then calculated by dividing the overall average rating factor for the old class plan by the overall average rating factor for the new class plan. Exhibit A2 displays the underlying exposure distributions, the average rating factors for the old class plan and the average rating factors for the new class plan for the Private Owned Motorcycle rating variables. Based on Exhibit A2: The overall average rating factor for the old class system is calculated as: (1.000 + 0.000 + 0.000 +0.000) = 1.000. The overall average rating factor for the new class plan is calculated as: (1.008 + 0.009 + 0.000 +0.003) = 1.020. Thus, the final offset for private owned motorcycles is calculated as: 1.000/1.020 = 0.980. It should be noted that ISO Israel used experience from the United States to test the accuracy of this method. That is, ISO Israel calculated sample offsets with United States experience using the 2 methods discussed above – re-rating full detail data versus calculating average rating factors on a variable by variable basis and combining them into a overall average rating factor as described above. The 2 methods produced nearly identical results, supporting the validity of this approach. Underlying Exposure Distributions In calculating the average rating factors and offsets, ISO Israel used experience provided by the Israel Central Bureau of Statistics, the Israel Ministry of Transportation and the Israel Police to derive the underlying exposure distributions. Details on the exposure distribution calculations for each individual variable are provided below. Page 42 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Section A Offsets and Distributions Rated Driver Age and Gender Distribution of licensed drivers in Israel by age and gender from the Ministry of Transportation (MOT). However, since there are roughly four times as many licensed drivers as there are motorcycles in Israel, and since the rating rules underlying the new class plan utilize only the age and gender information of the youngest driver of each vehicle for rating purposes, ISO Israel needed to adjust the licensed driver age and gender distributions obtained from the Ministry of Transportation to represent the distribution of rated drivers for this coverage. Specifically, the licensed driver age and gender distribution obtained from the Ministry of Transportation was assumed to over-represent the percentage of rated adult drivers, since adult operators will not be considered for age and gender rating purposes in those situations where a vehicle is driven by both an adult and a youthful operator (where a youthful operator is defined as an operator under the age of 24). In order to adjust the distribution of adult operators, ISO Israel scaled back the number of licensed drivers between the ages of 25 and 75 by the difference between the total numbers of licensed drivers and the total number of motorcycles in Israel. This adjustment was applied to the individual age groups (i.e., 2549, 50-64 and 65–74) based on each age groups’ percentage of the population of drivers between the ages of 25 and 75. The original age and gender distribution obtained from the MOT as well as the adjusted age and gender distribution are displayed on Sheet 1 of Exhibit A2. Years Licensed in Israel Distribution ISO Israel obtained information on the number of licensed drivers in Israel by years licensed from the Ministry of Transportation (MOT). Similar to age and gender, the years licensed data obtained from MOT could not be used directly to determine the distribution of rated drivers since there are roughly four times as many licensed drivers as there are motorcycles in Israel. Based on discussions with the Ministry of Finance, ISO Israel believes that the distribution of years licensed obtained by the MOT over-represents the higher number of years licensed categories, since drivers in Israel are more likely to operate motorcycles when they are younger and first starting to drive. As these drivers age and become more experienced, they may wind up driving private cars, but not necessarily canceling their motorcycle driver licenses right away. As a result, ISO Israel judgmentally adjusted the years licensed distribution obtained from the MOT to scale back the percentage of motorcycle drivers licensed for more than 16 years and to increase the percentage of motorcycle drivers licensed in all lower years licensed class groups. The original years licensed distribution obtained from the MOT as well as the adjusted years licensed distribution are displayed on Sheet 2 of Exhibit A2. Number of Accidents Distribution Since accident history information was not readily available on a vehicle basis from the Israel Police, ISO Israel used accident frequency information obtained from the Central Bureau of Statistics to estimate the distribution for this variable. According to the CBS, the 2001 personal injury accident frequency for motorcycles in Israel was 3.31%. Assuming that the distribution of accidents over a three year period can be estimated via the Poisson distribution with a parameter of 0.0993 (.0331 x 3): the probability of not being in an accident in a three year period is 90.55%, the probability of being in one accident in a three year period is = 8.99%, the probability of being in two accidents in a three year period is = 0.45% and the probability of being in three or more accidents in a three year period is = 0.01%. This distribution is displayed on Sheet 3 of Exhibit A2. Page 43 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Section A Offsets and Distributions Number of Major Convictions Distribution Since major conviction history information was not readily available on a vehicle basis from the Israel Police, ISO Israel used conviction frequency information obtained from the Israel Police to estimate the distribution for this variable. According to the Israel Police, there were 1,400,000 total convictions in Israel in 2001. Since information was not readily available on the number of major vs. minor convictions, ISO Israel used the ratio of major convictions to total convictions from the United States (major convictions represent 3% of total convictions in the United States) to estimate the number of major convictions in Israel. Thus, the total number of major convictions in Israel for 2001 was estimated to be 42,000 (1,400,000 x .03). Since these convictions represent convictions for all vehicle types, and there are 1,968,605 total vehicles in Israel (per the Ministry of Transportation), the probability of a vehicle being issued a major conviction in a given year is 2.13%. Assuming that the distribution of major convictions over a three year period can be estimated via the Poisson distribution with a parameter of .0639 (.0213 x 3): the probability of a vehicle not being issued a major conviction in a three year period is 93.81%, and the probability of a vehicle being issued one or more major convictions in a three year period is 6.19% (.0619 = 1 – .9381). This distribution is displayed on Sheet 4 of Exhibit A2. Corporate Owned Automobiles Calculation of Average Rating Factors and Offset Since the only proposed change from the class plan currently in effect in Israel for corporate owned automobiles are the factors to be applied for the Air Bags Indicator discount, and since all rating factors for the corporate owned automobiles are multiplicative, the offsets for this vehicle type can be calculated directly as the average Air Bags Indicator rating factor for the old class plan divided by the average Air Bags Indicator for the new class plan. Air Bags Indicator Distribution The distribution of vehicles in Israel with air-bags was estimated based on the distribution of private cars in Israel (latest model year in the file is model year 2002) obtained from the Ministry of Transportation and the assumption that airbags were used as of Model Year 1997 in Israel. The distribution of private cars by model year (and by the associated age distribution, where age is defined as the calendar year + 1 minus the model year) is displayed on Sheet 5 of Exhibit A1. Assuming that the Israeli private car age distribution remains fairly constant over time, in 2003 model year 1997 and newer vehicles will represent vehicles aged 0 – 7. Based on the Israeli age distribution displayed on Sheet 5 of Exhibit A1, approximately 56.11% of the Israeli vehicles on the road are aged 0 – 7. Thus, in 2003 approximately 56.11% of the cars on the road will be model year 1997 or newer, and will have air-bags. This distribution is displayed on Sheet 5 of Exhibit A1. Page 44 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Section A Offsets and Distributions As Sheet 5 of Exhibit A1 illustrates: The Air Bags Indicator average rating factor for the old class system is: 1.000 The Air Bags Indicator average rating factor for the new class system is: 0.986 Thus, the final offset for corporate owned automobiles is calculated as: 1.000/0.986 = 1.014. Page 45 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622 Proposed for 2003 March 14, 2003 update Risk Classification Plan Israeli Compulsory Vehicle Insurance Part B – Appendices Appendices Information about offsets and underlying exposure distributions – Exhibits A1 – A2 Exhibits A1 - A2 (9 exhibits overall) that support offsets. Page 46 of 46 Copyright, ISO Insurance Services Office of Israel, Ltd., 2001-2003 106763622