rating plan design… where the rubber meets the road in ratemaking… ellen berning, fcasjeff...
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Rating Plan Design… Where the Rubber meets the Road in Ratemaking…
Ellen Berning, FCAS Jeff Thompson, MBASegmentation Director State ManagerAllied Insurance Company Encompass Insurance
CAS Ratemaking SeminarMarch 10, 2005
PL - 6
2
Traditional Rating Plan Design Research and development of
new rating plans and relevant pricing has often been the domain of actuarial while verification, maintenance and other operational issues fell to other areas
Operational criteria often determine whether a new rating variable is economically viable.
Increased communication between actuarial, underwriting, and field offices is essential in today’s increasingly competitive environment
3
Rating Plan Design An Integrated Approach
The Scenario - California Wildfires(www.colliercountyredcross.org/ images/wildfire.jpg)
4
Overview of Rating Plan Design
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
5
Key Elements of Integrating Rating Plan Design
Scenario -Idea of New Discount “Red Paint” homes survived brush
fires with less damage than other color painted homes
Claim confirmed this observation throughout the devastated region
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
6
Key Elements of Integrating Rating Plan Design
Research & Development/Pricing
Currently system does not collect paint color of homes
Questions for data analysis: Is a “red paint” fire resistive? Is all red paint or certain
manufacturer? Is it a specific range of
pigmentations?
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
7
Key Elements of Integrating Rating Plan Design
Research & Development/Pricing
Currently system does not collect paint color of homes
Questions for data analysis: Is a “red paint” fire resistive? Is all red paint or certain
manufacturer? Is it a specific range of
pigmentations? Gather data to support
discount: Use industry, vendor, home
builder or paint manufacturer information, claim data
Contact insured/builders about brand of paint used
Contact manufacturers for a red paint ingredients
Internet research on paint pigments and fire resistivity
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
8
Key Elements of Integrating Rating Plan Design
Research & Development/Pricing
Currently system does not collect paint color of homes
Questions for data analysis: Is a “red paint” fire resistive? Is all red paint or certain manufacturer? Is it a specific range of pigmentations?
Gather data to support discount: Use industry, vendor, home builder or
paint manufacturer information, claim data
Contact insured/builders about brand of paint used
Contact manufacturers for a red paint ingredients
Internet research on paint pigments and fire resistivity
Determine the appropriate amount of discount
Determine the impact of discount on book of business
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
9
Key Elements of Integrating Rating Plan Design
Underwriting
How is discount applied?
Agent or system applied ‘Red paint” determined
by observation or special skills?(e.g. not color-blind, knowledge on manufacturer, fire resistivity)
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
10
Key Elements of Integrating Rating Plan Design
Underwriting How is discount applied?
Agent or system applied ‘Red paint” determined by
observation or special skills?(e.g. not color-blind, knowledge on manufacturer, fire resistivity)
Protect integrity of rating plan
Is a verification process needed?
How much is the discount? “We’re Watching” effect Expected distribution is too
high?
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
11
Key Elements of Integrating Rating Plan Design
Underwriting Execution & Processing
Determine Potential Verification Options
Back End Spot-check -Manual Process to review proof of “Red Paint”
Home inspection - Photos Agent drive-by Homeowner questionnaire
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
12
Key Elements of Integrating Rating Plan Design
Underwriting Execution & Processing
Determine Potential Verification Options
Back End Spot-check -Manual Process to review proof of “Red Paint”
Home inspection - Photos Agent drive-by Homeowner questionnaire
Evaluation of Options
Field Impact -Regional Office, Agent
Legal Implications Customer Impact Develop Cost/Benefit analysis -
E.g. system cost to create new screens for new discount, inspection cost
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
13
Key Elements of Integrating Rating Plan Design
Underwriting Execution & Processing Determine Potential Verification Options
Back End Spot-check -Manual Process to review proof of “Red Paint”
Home inspection - Photos Agent drive-by Homeowner questionnaire
Evaluation of Options Field Impact -Regional Office,
Agent Legal Implications Customer Impact Develop Cost/Benefit analysis -E.g.
system cost to create new screens for new discount, inspection cost
Find the optimal verification
solution If verification is not feasible,
discuss w/ Research & Development
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
14
Key Elements of Integrating Rating Plan Design
Underwriting Execution & Processing
Monitor implemented cost justified process
Continuous evaluation of effectiveness of verification process
Send survey to homeowner upon renewal (paint color can be easily changed)
Reinspect periodically Determine actual vs expected
distributions Evaluate loss experience Review Cost/Benefit on a regular
basis to support process continuation
Observe Agent Behavior -Non Compliance measurement
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
15
Key Elements of Integrating Rating Plan Design
Underwriting Execution & Processing
Monitor implemented cost justified process
Continuous evaluation of effectiveness of verification process
Send survey to homeowner upon renewal (paint color can be easily changed)
Reinspect periodically Determine actual vs expected
distributions Evaluate loss experience Review Cost/Benefit on a regular
basis to support process continuation
Observe Agent Behavior -Non Compliance measurement
Ongoing Review of Comprehensive Impact on Business System
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
16
Key Elements of Integrating Rating Plan Design
Research & Development/Pricing
Information collected during verification and maintenance process may supplement data collected through more traditional means
Pricing of factor can be refined
as various types of data is collected
Other types of information showing up in loss data
While red paint more fire resistive, more venerable to hail damage
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
17
Key Elements of Integrating Rating Plan Design
Research & Development/Pricing
Data collection leads to information on other paint colors, leads to implementation of a “pigment factor”
Any effects on results due to marketing campaigns?
Attract more customers with red houses
Encourage more customers to paint houses red
Is the effect due to customer characteristics – those who would chose to paint a house red, and not from the pigment itself?
Introduce a “Red Paint” Discount
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
18
Research & Development,
Pricing
Underwriting Execution & Processing
UnderwritingUnderwriting Execution & Processing
Integrated Rating Plan
Design Strategies
Explore Data Verification Options
Gather & Analyze Data
Develop Data Verification Processes
Compliance & Quality Performance Tracking &
Analysis
ReviewMeasures ofSuccess…furtherDevelopment??? Key Elements of
Integrating Rating Plan Design
With all parties of the Integrated Strategy at the Table: • Are we comfortable with the results?•Commitment to monitor results on an ongoing basis?•Commitment to utilize the process for alterations