2005 CAS RATEMAKING SEMINAR2005 CAS RATEMAKING SEMINAR

Product DevelopmentProduct Development COM-2 COM-2

Small CommercialSmall CommercialBusinessownersBusinessowners

Dan Carr, FCAS, MAAADan Carr, FCAS, MAAA

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Notes/CaveatsNotes/Caveats

All data and numbers are fictitiousAll data and numbers are fictitious

Class and coverage comparisons are Class and coverage comparisons are either made up or mixed up, so no either made up or mixed up, so no company is represented accurately, company is represented accurately, including my ownincluding my own

We don’t use all of the suggested We don’t use all of the suggested rating methods, and we may use rating methods, and we may use some others not discussedsome others not discussed

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BackgroundBackground

Proprietary BOPProprietary BOP

Mix of composite & divisibly ratedMix of composite & divisibly rated

Contributions fromContributions from

TravelersAetna

St. Paul

USF&G

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Product Development GoalsProduct Development Goals

Attract more customersAttract more customers– Improve automation & ease of doing businessImprove automation & ease of doing business

Update the productUpdate the product– Core policy formCore policy form –– More adequate/More adequate/– Optional coveragesOptional coverages competitive pricescompetitive prices

Expand product offeringExpand product offering– ClassesClasses– CoveragesCoverages

Integrate two companies’ productsIntegrate two companies’ products– Minimize disruptionMinimize disruption

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OverviewOverview

What starts the processWhat starts the process

PlayersPlayers

Steps along the waySteps along the way

Pricing the product changes: Pricing the product changes: ExamplesExamples

Other considerationsOther considerations

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The Beginning:The Beginning:Ongoing Product ReviewOngoing Product Review

Coverage Issues

• Internal (e.g.,

claim review)

• External (e.g.,

legislative, court

decisions)

Ease of Doing Business

• Agent identified• Internal

(actuarial, product, operations, IT)

Competitor Actions• Coverage• Pricing• Split vs. Composite

Product Product EvolutionEvolution

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Ease of Doing BusinessEase of Doing Business

Actuarial/Product/UnderwritingActuarial/Product/Underwriting– Track rating/underwriting criteriaTrack rating/underwriting criteria

Policy endorsementsPolicy endorsementsCoding claims to appropriate endorsementsCoding claims to appropriate endorsements

– Add new functionalityAdd new functionalityPredictive modelingPredictive modelingReal time geocoding for territorial strategiesReal time geocoding for territorial strategies

ITIT– Clean up/eliminate/replace/understand Clean up/eliminate/replace/understand

legacy codinglegacy coding

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Ease of Doing Business Ease of Doing Business (cont.)(cont.)

Operations/UnderwritingOperations/Underwriting– Ensure the right product and Ensure the right product and

underwriting/operational process is underwriting/operational process is used based on risk criteriaused based on risk criteria

Customer (Agent and Insured)Customer (Agent and Insured)– Faster, more intuitive agent processingFaster, more intuitive agent processing– Clearer policy presentationClearer policy presentation

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Competitor Comparison: Competitor Comparison: ClassClass

Names changed, companies switched around, some classes made up.

CompanyClassification

Competitor A Competitor B Competitor C Competitor D Competitor E

Barber Shops (Service) Barber Shops (Service)

Barber Shops Barber & Beauty Shop (Service)

Barber Shop (Retail, Wholesale, Services)

Barber Shops (Service)

Beauty Parlors and Hair Styling Salons (Service)

Beauty Parlors and Hair Styling Salons

(Service)

Beauty Parlors Barber & Beauty Shop (Service)

Beauty Parlor - including Nails,

Manicure, or Facial Shops (Retail,

Wholesale, Services)

Beauty Parlors (Service)

Business Services - NOC - except personal

care (Office)

Business Services - NOC - except

personal care (Office)

Service, NOC (Service)

Carpet, Rug and Upholstery Cleaning -

Shop Only

Carpet, Rug & Upholstery Cleaners

(Contractors)

Computer Repair Computer Service & Repair (Service)

Dental Laboratories (Service)

Dental Laboratories (Service)

Dental Laboratories Dental Labs (Service) Dental Laboratory (Retail, Wholesale,

Services)

Dental Labs (Service)

Diaper, Uniform and Linen Supply

Diaper/Uniform/Linen Service (Service)

Diaper Cleaning / Linen Supply (both Retail, Wholesale,

Services)

Diaper Service / Linen Supply (both

Service)

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Competitor Comparison: Competitor Comparison: CoverageCoveragePROPERTY COVERAGES Company Competitor A Competitor B

Accounts Receivable Included in the BPP limit $x on premises ** $y off premises $z on premises

Appurtenant Buildings and Structures

No coverage No coverage No coverage

Arson and Theft Reward $x (not applicable in State X) No coverage No coverage

Brands and Labels No coverage No coverage No coverage

Business Income and Extra Expense (including Civil Authority)

x Months Actual Loss Sustained ** Extended Period of Indemnity 30 Days ** No hour time period under "period

of restoration" ** Civil Authority - up to three consecutive weeks

y Months Actual Loss Sustained ** Extended Period of Indemnity of 30 days, unless a greater number of consecutive days is shown in the

Declarations** "Period of Restoration" begins 72 hours after time of loss **

Civil Authority - up to three consecutive weeks

Unlimited for 365 days if occurs within 100 feet of premises ** No hour time period under "period of restoration" **

Civil Authority - 30 days

Business Income and Extra Expense - Newly Acquired

Locations

No coverage $x at each location $y

Business Income from Dependent Properties (when Business Income

is included)

$x $x ** Begins 72 hours after time of loss $x

Claim Data Expense (cost of preparing inventory and income

statements)

$x No coverage $x

Computer Hardware and Media Covered as BPP (causes of loss on policy apply)

Included as part of BPP (Causes of loss apply including mechanical

breakdown, electrical arcing, and change in temperature)

Covered as BPP (Causes of loss on policy apply)

Debris Removal x% of Covered Property x% of Covered Property plus $y x% of Covered Property plus $y

Definition of Premises Within x feet of premises Within x feet of premises Within x feet of premises

Names changed, companies switched around, no actual St. Paul Travelers information.

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Finalize Product Changes- Coverages, Options, Classes, Rate Structure, Rules

Detailed Business, Operational and System Specifications

Finalize Core Forms / Amendatory Forms Drafts

Other Forms, Rates, Rules, apps, risk control support and Program Manuals

Business, Claim, & Legal Review

Final Materials to Filing/Regulatory

Rate & Form Filings

Filing Approvals

Systems Support (Program, Testing, Final Implementation)

NB and Renewals Effective

Prerenewal Window

Rate Analysis / Rate Formulation / Rate Table Creation / Rating Logic

Training

Product Development Product Development TimelineTimeline

Project Team:Product/UnderwritingActuarial RegulatoryOperations ClaimsRisk Control MarketingIT Training

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Summarize Core Product Summarize Core Product ChangesChanges

Explain the changeExplain the changeSummarize coverage form changesSummarize coverage form changesSummarize underwriting rule changesSummarize underwriting rule changesSummarize rating rules & rate structureSummarize rating rules & rate structureReference point for more detailed Reference point for more detailed specifications, later:specifications, later:– Forms/endorsementsForms/endorsements– Rating logic, rate application, rate derivationRating logic, rate application, rate derivation– Programming logicProgramming logic

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Finalize Product Changes- Coverages, Options, Classes, Rates, Rules

Detailed Business, Operational and System Specifications

Finalize Core Forms / Amendatory Forms Drafts

Other Forms, Rates, Rules, apps, risk control support and Program Manuals

Business, Claim, & Legal Review

Final Materials to Filing/Regulatory

Rate & Form Filings

Filing Approvals

Systems Support (Program, Testing, Final Implementation)

NB and Renewals Effective

Prerenewal Window

Rate Analysis / Rate Formulation / Rate Table Creation / Rating Logic

Training

TimelineTimeline

Project Team:Product/UnderwritingActuarial RegulatoryOperations ClaimsRisk Control MarketingIT Training

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Rate DevelopmentRate Development

Expand core coverage limitsExpand core coverage limits– Impacts base ratesImpacts base rates– Impacts pricing for excess optional Impacts pricing for excess optional

coveragecoverage

Embed current optional coveragesEmbed current optional coverages– ExampleExample

Add new rates for new classesAdd new rates for new classes– ExamplesExamples

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Rates: Embedding Rates: Embedding CoverageCoverageExample: First $X of Accounts ReceivableExample: First $X of Accounts Receivable

BackgroundBackground

Currently only offered as optional Currently only offered as optional coverage as Rate x AR Limitcoverage as Rate x AR Limit

Rate varies by protection & constructionRate varies by protection & construction

Core BPP coverage will include first $X of Core BPP coverage will include first $X of AR >> need to convert exposure baseAR >> need to convert exposure base

Optional coverage will be on excess basisOptional coverage will be on excess basis

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Rates: Embedding Rates: Embedding CoverageCoverageExample: First $X of Accounts ReceivableExample: First $X of Accounts Receivable

StepsSteps

1.1. Evaluate adequacy of current optional AR Evaluate adequacy of current optional AR ratesrates

2.2. Base rate adjustmentBase rate adjustment– Don’t give up lost optional coverage Don’t give up lost optional coverage

premiumpremium– Account for increased utilizationAccount for increased utilization

3.3. Adjust optional coverage rates (now excess)Adjust optional coverage rates (now excess)

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Accounts Receivable Accounts Receivable Embedding Example: Base Embedding Example: Base Rate AdjustmentRate AdjustmentTotal core coverage premium:Total core coverage premium: $1,000,000$1,000,000

Current AR optional coverage premium:Current AR optional coverage premium: $50,000$50,000In 1In 1stst $X layer : $X layer : $30,000$30,000

Base Rate Adjustment – Not Lose PremiumBase Rate Adjustment – Not Lose Premium +3%+3%

Core coverage premium, policies w/o ARCore coverage premium, policies w/o AR $900,000$900,000Frequency adjustment:Frequency adjustment: 0.150.15

Add’l. Rate needed for policies w/o coverage today:Add’l. Rate needed for policies w/o coverage today: +0.45%+0.45%Compared to total core coverage premium:Compared to total core coverage premium: + 0.27%+ 0.27%

Total base rate adjustment needed:Total base rate adjustment needed: + 3.27%+ 3.27%

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Accounts Receivable Accounts Receivable Embedding Example: Base Embedding Example: Base Rate AdjustmentRate AdjustmentIssuesIssues

Rate adequacy of optional coverageRate adequacy of optional coverage

Core coverage rate adequacyCore coverage rate adequacy

Utilization:Utilization:

– What will frequency/severity be on What will frequency/severity be on customers who did not purchase the customers who did not purchase the coverage previously?coverage previously?

– How to measure?How to measure?

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Rates: New Rates for New Rates: New Rates for New ClassesClassesHow to Develop New Rates?How to Develop New Rates?

Adapt rates from other productsAdapt rates from other products

CompetitionCompetition

ISOISO

ConsiderationsConsiderations

New business only?New business only?

Disruption?Disruption?

Competitor comparisonCompetitor comparison

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Example 1: New Split GL/Prop Example 1: New Split GL/Prop RatesRatesAdapt from Composite BOP RateAdapt from Composite BOP Rate

Composite BOP RateComposite BOP Rate $50.00$50.00 per $100 TIVper $100 TIV

Property % of Total LossesProperty % of Total Losses 60%60%

Implied Split RateImplied Split Rate

PropertyProperty $30.00$30.00 per $100 TIVper $100 TIV

GLGL $20.00$20.00 per $100 TIVper $100 TIV

GL Exposure BaseGL Exposure Base SalesSales (per $1,000)(per $1,000)

Sales / TIV RatioSales / TIV Ratio 2 : 12 : 1 ($1 million sales per ($1 million sales per

$500K Prop. values)$500K Prop. values)

GL Rate on Sales Exposure BaseGL Rate on Sales Exposure Base $10.00$10.00 (20 ÷ 2)(20 ÷ 2)

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Example 1: New Split GL/Prop Example 1: New Split GL/Prop RatesRatesAdapt from Composite BOP Rate (cont.)Adapt from Composite BOP Rate (cont.)

Issues/ConsiderationsIssues/Considerations

Adequacy of current composite ratesAdequacy of current composite rates

Source for GL Exposure Base / Property Source for GL Exposure Base / Property Exposure Base (e.g., Sales / TIV) ratioExposure Base (e.g., Sales / TIV) ratio

Variance of Sales / TIV ratio across Variance of Sales / TIV ratio across insuredsinsureds

Definition of GL Exposure base (e.g., Definition of GL Exposure base (e.g., How to define Sales?)How to define Sales?)

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Example 2: New Split GL/Prop Example 2: New Split GL/Prop RatesRatesBased on ISO Commercial Package Based on ISO Commercial Package

PolicyPolicy

Composite GL Rate:Composite GL Rate: (ISO Prem/Ops Loss Cost(ISO Prem/Ops Loss Cost

xx Prem/Ops ILFPrem/Ops ILF

++ ISO Products Loss CostISO Products Loss Cost

xx Products ILF)Products ILF)

xx ISO Package ModISO Package Mod

xx Coverage Adjustment Factor vs. ISOCoverage Adjustment Factor vs. ISO

xx Loss Cost MultiplierLoss Cost Multiplier

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Example 2: New Split GL/Prop Example 2: New Split GL/Prop RatesRatesBased on ISO Commercial Package Based on ISO Commercial Package

PolicyPolicy

CompositeComposite [[ (ISO Group I Loss Cost(ISO Group I Loss CostBuilding RateBuilding Rate x ISO Territory Multiplier x ISO Territory Multiplier

x ISO Protection Type Multiplierx ISO Protection Type Multiplierx ISO $250 Deductible Factor)x ISO $250 Deductible Factor)

++ (ISO Group II Loss Cost(ISO Group II Loss Costx ISO Protection Type Multiplier x ISO Protection Type Multiplier x ISO $250 Deductible Factor)x ISO $250 Deductible Factor)

++ (ISO SCOL Loss Cost(ISO SCOL Loss Costx ISO Protection Type Multiplier) ]x ISO Protection Type Multiplier) ]

xx (1 + Theft Factor(1 + Theft Factor+ Coverage Adjustment Factor vs. ISO)+ Coverage Adjustment Factor vs. ISO)

xx Loss Cost Multiplier x ISO Package ModLoss Cost Multiplier x ISO Package Mod

(Composite BPP rate can be calculated similarly. BII is a different animal.)(Composite BPP rate can be calculated similarly. BII is a different animal.)

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Example 2: New Split GL/Prop Example 2: New Split GL/Prop RatesRatesBase on ISO Commercial Package PolicyBase on ISO Commercial Package Policy

Issues/ConsiderationsIssues/ConsiderationsSome are same as using ISO loss costs in Some are same as using ISO loss costs in general (e.g., ULAE provision)general (e.g., ULAE provision)Coverage differencesCoverage differencesRate basis differences (GL limit, Property Rate basis differences (GL limit, Property base deductible, etc.)base deductible, etc.)““a” ratesa” ratesSpecific ratesSpecific ratesTerritory definition differencesTerritory definition differencesClass definition differencesClass definition differencesExposure base differencesExposure base differencesAbility to mimic ISO ratingAbility to mimic ISO rating

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Finalize Core Product Changes- Coverages, Options, Classes, Rates, Rules

Finalize Product Expansion Classes, Exposure Base and Product Design

Detailed Business, Operational and System Specifications

Finalize Core Forms / Amendatory Forms Drafts

Other Forms, Rates, Rules, apps, risk control support and Program Manuals

Business, Claim, & Legal Review

Final Materials to Filing/Regulatory

Rate & Form Filings

Filing Approvals

Systems Support (Program, Testing, Final Implementation)

NB and Renewals Effective

Prerenewal Window

Rate Analysis / Rate Formulation / Rate Table Creation / Rating Logic

Training

TimelineTimeline

Project Team:Product/UnderwritingActuarial RegulatoryOperations ClaimsRisk Control MarketingIT Training

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Rates: Other ConsiderationsRates: Other Considerations

Competitive analysisCompetitive analysis

Rating Specifications for ITRating Specifications for IT

Rate/Rule/Form FilingsRate/Rule/Form Filings

Systems testingSystems testing

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Other ConsiderationsOther ConsiderationsField inputField input

Coverage FormsCoverage Forms

Marketing materialsMarketing materials

Agent manualsAgent manuals

Claim department impactsClaim department impacts

Legal reviewLegal review

TrainingTraining– Field office marketing & underwriting staffField office marketing & underwriting staff– Service centersService centers– AgentsAgents

End of PresentationEnd of Presentation

Dan Carr, FCAS, MAAADan Carr, FCAS, MAAA22ndnd Vice President & Actuary Vice President & Actuary

St. Paul TravelersSt. Paul Travelersdgcarr@spt.comdgcarr@spt.com

Discussion & QuestionsDiscussion & Questions