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 17 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 19 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 26 What’s new for BOP? • • • • • 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 Technology Financial Institutions Educational Institutions Religious Institutions Miscellaneous Property Only 28 Financial Institutions • Classes: Savings & Loan Investment Company Mortgage Bankers Finance Company – Personal Finance Company – Commercial Credit Unions Banks & Other Financial Institutions 29 Schools & Educational Services • Classes Include: 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: • • • • • 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 37 Q&As 38