Commercial Package Pricing
Rating & Product Development
Considerations
Joanne Reitz
The Hartford
2003 CAS Ratemaking Seminar
What is BOP?
•
•
•
•
•
Small commercial
Less than 20 employees
Less than 10-15M in sales
Package business
Bundled optional coverages
3
BOP Ratemaking Challenges
Rapidly expanding marketplace
o New businesses (e.g., cellular phones, e-commerce)
o
o
New exposures (e.g.,mold, terrorism)
New exposures (e.g. religious and financial institutions)
Significant product & rating variations
o
o
Lack of true industry benchmarks
Complicates competitor analysis & marketing strategies
Continued coverage expansion &
eligibility
4
BOP Product Development
Monitor Success
(New/ Conversion)
Profile
“non-Bop”
Book
Develop Filing
Strategy & Gain
Approvals
Est.
Product
Goals
Identify & Develop
New Classes
Develop Conversion
& Transition Plan
Develop
Rating
Approach &
Rates
Identify & Develop
New Coverage
5
Actuarial Challenges
Profiling “non-BOP”
book
o
o
o
Class
Coverage
Pricing
Product Goals
o
o
o
Timeframe
Automation contraints
% book to convert
Rating Methodologies
o
o
o
Introduce new exposure
bases
Classes
Rate Tiers
Conversion
o
o
o
Conversion Tier
Goal: Limit Price Chg
+/- 15%
NOC class
6
Actuarial Challenges
Transition Plan
o
o
o
Guidelines
Collect data on reasons
not converted - future
product enhancements
Filing Strategy
• Visit with Regulators
Monitoring
o
Pricing
• Use of Tiers, Schedule
-> problem with rate
level or rating
structure
• Use of conversion
mod
• Use of NOC class


Type of business
(class or price)
Use by Territory
7
BOP Ratemaking
Use of Competitive analysis in
ratemaking & pricing decisions
o
o
o
Surrogate for Industry Loss Costs
Formally introduced into ratemaking (i.e., as
complement of credibility)
Informally used in rate/price decisions
Requires:
o
o
Selection of competitors as benchmarks
Overall pricing strategy
8
BOP Product & Rating Variations
Territory definition
High limit credits
Protection &
construction groupings
Split vs. single exposure
rating (property vs.
liability)
Rate groups vs. class
rates *
All risk loads
Amount of insurance
curves
* Class rating becoming more
common, even for building
exposures
Class eligibility &
definitions
Program eligibility
(sales, limits, sq. ft.)
Use of CPP instead of
BOP
9
BOP Company Rating Formulas
No. of Retail
Occ. Groups
Liability
Limits
1. (Rate x Liab ILF) x AOI +ARL
12
1,000,000
2. (Rate + Liab Incr) x AOI
5
300,000
3. (Rate + Liab Incr) x AOI + ARL
8
300,000
4. Rate x AOI + Liab Prem
5
500,000
Individual
Class Factors
9
300,000
Co.
Rating Formula
5. (Rate x Liab Incr x Class Factor) x
AOI
6. Basic Prem + (Liab Incr x AOI)
300,000
10
BOP Rating Variations
While competitive analysis is essential,
almost impossible to get to “target” rate
level in every territory & class
Agent has a “portfolio” of companies &
prices to choose from
Rating & pricing plans both
o
o
Help bridge gap
Complicate market pricing
11
Common BOP Rating & Pricing
Plans
Rating Plans
Advantage
Disadvantage
Schedule rating Flexibility
Expense & documenation
Renewal credits Encourage high
renewal retention
Doesn’t differentiate between
quality of renewal risks; higher
new business price
Account Credit Encourages rounding Not significantexpense savings
out accounts
on multi vs single policy risks
Policy Size
Credits
Attracts larger risks
Not significant expense
differentials for smaller BOP
Recognizes fixed vs.
market
variable expensing
Rating Tiers
Flexibility
Consistency in application;
ability to slot risks equitably
12
Need for Pricing Tools For BOP
Risk Characteristics not Reflected in Rating Variables

Sub-classifications

Alarm systems

Specific risk locations

Guard or watchman

Number of years in
Business

Number of visitors on
premises

Financial strength


Economic trend for the
specific business
Employee training
programs

Employee turnover

Formal safety and loss
control programs

Unique carrier claim
department
competencies
13
Predictive Power of Loss Experience
L/R
Freq
0
1
2
3+
Risk's Claim Counts
14
Predictive Power of Loss
Experience
85-90% of BOP’s have no prior losses
o
Loss History not a discriminating pricing
tool
Loss History strong underwriting tool
o
Loss ratio and claim frequency predicted to
be significantly higher when prior loss
activity
15
Use of Credit on Small Commercial
 “Proven” for u/w selection and pricing in
Personal Lines
 Natural extension => small commercial
 More overlap with existing u/w process (little
or no l/r correlation on larger accounts)
 Data availability (credit “hit” ratios)
o
Option: use of personal credit for sole proprietors
16
Predictive Power of Credit
Grp Grp Grp Grp Grp
1
2
3
4
5
L/R
Grp 1
Grp 2
Grp 4
Grp 5
Grp 3
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Predictive Power of Credit
Strong correlation between credit and
loss ratio
More discriminatory
o
o
20+% of risks identified as better than
average
20+% of risks identified as worse than
average
18
BOP Rating Plans
 Rating tiers provide flexibility to address
risk characteristics not found in rating
plans
 Lack of data impedes ability to quantify
impact of various risk characteristics
 The successful carriers will identify &
price the “non-rating” variables
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Other BOP Market Trends
Alternative distribution channels
o
o
o
Service centers, dedicated sales force, mass marketing,
niche marketing, Internet, Banks
Let the customer choose the way they want to buy
Potential commission & expense reductions, flowing into
more competitive products
Affinity Programs
o
Coverage “hooks”, preferred rate levels, dividend plans
Coverage expansion
o
o
Differentiate products
Pricing tool -> little/no charge
20
Optional Coverages
Premium Trend
Premium Mix By Covg
100%
Opt
Covg
Liability
80%
60%
Larger % of Liability
Premium driven by
introduction/growth of
split rated programs
(mfg, ctr)
BPP
40%
Bldg
20%
0%
1996
2002
Policy Year
Optional coverage
premium has grown
from 14% of total to
over 20% in six years
21
Optional Coverages
Loss Trend
Loss Mix By Covg
100%
60%
Opt
Covg
Liability
40%
BPP
20%
Bldg
80%
0%
1996
2002
Policy Year
Despite more
exposure in
Optional
coverages, losses
associated with
Optional
coverages have
stayed flat or
slightly declined.
22
BOP Losses By Cause of Loss
No change in mix
of losses by “major”
coverage over past
6 years, dispite
change in class mix
Loss Mix
9%
32%
59%
Cats
AO Prop
AO Liab
23
BOP Property Losses By Cause of
Loss
Prop Cause of Loss
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Fire accounts for 40+%
of Property losses
Slightly more losses
due to Burglary &
Theft
No other material shifts
in C.O.L. over the 6
year period
1996
Burglary
EC/AOL
Water
2002
Fire
Wind&Hail
24
BOP Liability Losses By Cause of
Loss
Liab Cause of Loss
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Slip & falls accounts
for 40% of Liability
losses
Products account for
15% of losses
1996
AI/PI
Products
Inj/Damage
2002
Slip&Fall
Struck by Obj
AO
Only material change
over 6 years is
reduction in losses due
to Adv & Per Injury
25
BOP Coverage Enhancements
 Difficult to quantify impact of increased
coverage on BOP loss costs
o
o
o
Coverage becomes a competitive issues
Helps reduce agents E&O exposure
Is there real value for the consumer?
 Ratemaking challenges
o
•
Different exposure than “traditional” BOP coverages
A
 Automation challenges
o
Underwriting intensity: More Information required
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What’s new for BOP?
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New Classes
New Exposures
New Coverages
New Optional Coverages
New Rating Approaches
27
BOP Product Development
Moving farther away from the “typical”
BOP exposure
• New Classes
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Technology
Financial Institutions
Educational Institutions
Religious Institutions
Miscellaneous
Property Only
28
Financial Institutions
• Classes:
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Savings & Loan
Investment Company
Mortgage Bankers
Finance Company – Personal
Finance Company – Commercial
Credit Unions
Banks & Other Financial Institutions
29
Schools & Educational Services
• Classes Include:

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Business & Professional Educational Services
Trade & Vocational Schools
Recreation, Leisure & the Arts Schools
Private Academic Institutions
30
Religious Institutions
• Classes:





Churches and Other Houses of Worship
Cemeteries, Associated with a Church
Clergy Residence
Church Office (Separate Building)
Church Hall (Separate Building)
31
Other New Classes Include:
•
•
•
•
•
Art Conservator
Cable Laying for Computer Networks
Counter Top Manufacturer
Small Motor/Engine Repair
Vinyl Sign Manufacturer
32
Property Only Classes, including:
•
•
•
•
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Detective Agency
Express Companies
Public Buildings
Sun Tanning Salons
Swimming Pool Installation
33
New Exposures
• Terrorism
• Mold
34
Additional Exposure Considerations
•Computer & Media Equipment
•Data, Software & Programming
•Auto Liability
•Workers Compensation
•Special Events
35
New Coverages
Packaged as Options or Built
in at Low Limits:
EPLI
E&O
D&O
Blanket Limits
International
36
New Optional Coverages
Actual Loss Sustained Business Income Specified Limit
• Fixed Dollar Limit
• Determined based on Percentage of
Sales
• Mandatory for classes with higher
potential for rapid growth
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Q&As
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