Businessowners (BOP) Class Plans

2003 CAS Ratemaking Seminar

March 27-28, 2003

Robert J. Walling, FCAS, MAAA

Traditional BOP Rating Features

Large, traditional territory definitions Clustering of occupations Clustering of fire protection classes Simple approach to amount of insurance (AOI) Significant U/W discretion (Schedule credits) Bundled (composite) class rate

Businessowners Problems

Market has disagreed on:– Which classes to cluster/target– Construction relativities– Territory definitions– Occupancy factors (Malls, Single Occupancies,

Multiple Occupancies w/ Restaurants)

Many rating factors available but not incorporated into rating sequence

U/W Tiers & Credits Gone Amok

BOP Relativity Differences

State X BOP Relativity Analysis

0.25

0.75

1.25

1.75

2.25

2.75

Construction/Protection

Re

lati

vit

y

ISO BldgCO 1 BldgCO 2 Bldg

BOP Relativity Differences

State X BOP Relativity Analysis

0.60

0.80

1.00

1.20

1.40

1.60

Construction/Protection

Re

lati

vit

y

ISO CntCO 1 CntCO 2 Cnt

How can credits be abused?

Company

Tiering

Factor

Schedule

Max/Min

Percent of Manual

Barbershop I.C. 1.25 +40% 175%

Barbershop I.C. 1.25 -40% 75%

Vanilla I.C. 1.00 +40% 140%

Vanilla I.C. 1.00 -40% 60%

BTA I.C. 0.85 +40% 119%

BTA I.C. 0.85 -40% 51%

TPet I.C. 0.70 +40% 98%

TPet I.C. 0.70 -40% 42%

THE HIGHEST

NET RATE IS OVER FOUR TIMES THE

LOWEST!!

BOP Pricing Enhancements

Revise class factors Revise territories using zip codes

– May have impact similar to Homeowners on Protection

Create more sound AOI curve Improve predictive accuracy of net pricing

– Reduce reliance on underwriting discretion– Add financial info and other insured characteristics– Add rating/tiering factors for application

information currently not rated

BOP Solutions – What are Companies Doing?

Many use ISO class codes with class deviations or individual class factors

Some have homeowners-like amount of insurance curves A few use tiering programs like Personal Lines

underwriting guidelines to use additional app information

BOP Pricing Enhancements

Revise class factors Revise territories using zip codes

– May have impact similar to Homeowners on Protection

Create more sound AOI curve Improve predictive accuracy of net pricing

– Reduce reliance on underwriting discretion– Add financial info and other insured characteristics– Add rating/tiering factors for application

information currently not rated

Approaches to Improving Net Pricing

Status quo Build a better underwriter “One and Done” tiering One way factors (e.g. “Mall Credit”) Multivariate U/W scoring systems

How to Build a Better U/W

Improve accuracy of manual rates by class– Especially for “flow” classes (office, book store, etc.)– Automation increases rating algorithm flexibility and

ease of implementing new rating factors Focus attention on larger risks and classes

– Has expense implications as well Treat U/W as a pricing variable!

– Accentuate the positives!– Train, remediate, and reunderwrite the

negatives

BOP Regional Underwriting Review

Percent of Manual

Program 50-74% 75-99% 100% 101-125% > 125%

Contractors 123% 111% 84% 82% 68%

Habitational 104% 103% 107% 95% 93%

Office 96% 104% 102% 92% 109%

Restaurant 117% 113% 111% 114% 112%

Retail/Service 110% 101% 93% 95% 98%

Wholesale 80% 92% 90% 113% 122%

BOP Solutions – Underwriting Scoring Systems

Take data off the application that is not rated: Percent Occupied • Elevators Years in Business • Years of Same Mgt. Age of Building • Updated Systems Alarms • Sole Occupancy Computer Back Ups • Hours of Operation Building Height • Deliveries? Swimming Pools • Franchise? Safety Program • # of Employees/Leasing

Out of schedule credits and into rating

Underwriting Scorecard Example

Underwriting Score Points - D&B Financial Assessment

Strength High Good Fair Limited5A 250 250 200 1504A 250 250 200 1503A 250 250 200 1502A 250 200 150 1001A 250 200 150 100BA 250 200 150 100BB 250 200 150 100CB 200 200 150 100CC 200 200 150 100DC 200 150 100 50DD 200 150 100 50EE 200 150 100 50FF 200 150 100 50GG 200 150 100 50HH 200 150 100 50

Absence 250 200 150 100

Composite Credit Appraisal

Underwriting Scorecard Example

Years of PercentCurrent Score Building ScoreControl Points Occupied Points

>10 150 >95% 1006-10 75 65-95% 500-5 0 <65% 0

Part Time/ Score Safety ScoreFull Time Points Program Points

<33% 50 Formal 5033% - 67% 25 Informal 25

>67% 0 None 0

Building < 25 Yrs Old 25 Pts Owner on Premises 15 PtsCentral Alarm 25 Pts Franchise 10 PtsNo Parking Lot 10 Pts Closed by 9 pm 10 PtsOffsite EDP Backup 5 pts No Delivery 5 pts

Underwriting Scorecard Example

Cumulative TieringPoint Range Factor

0 - 99 1.00100 - 199 0.92200 - 299 0.84300 - 399 0.76400 - 499 0.68500 - 599 0.60600 - 700 0.52

Problem with his Approach - Interactions and Overlaps

1.70

1.32

1.19

1.04

0.86

0.73

1.51

1.24

1.12

1.00

0.90

0.81

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

1 2 3 4 5 6

Level

Ind

ica

ted

Ra

te D

iffe

ren

tia

l

Loss Ratio

GLM

Interactions Example

Pure Premium Relativities by Program and Years in Business

0-3 4-6 7-10 10+

Years in Business

Pu

re P

rem

ium

Re

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vit

y

Contractors

Habitational

Office

Restaurant

Retail/Service

Wholesale

Underwriting Scorecards Reflecting Interactions

Multivariate analysis allows the modeling of interactions and modern policy management systems facilitate the implementation of more complex tiering systems

Years ofCurrentControl Contr. Habit. Off. Rest. Ret./Serv. Wholes.

0-3 60 115 120 70 95 1004-6 100 130 125 85 100 110

7-10 120 135 135 100 120 12510+ 150 150 150 150 150 150

Score Points