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KEEPING UP WITH THE JONES’

 

Has your company kept up with the use of analytics in rating? Do you follow the filings of a service organization? Do you enhance your own rating schemes?  Do you know what might happen if you do not follow what is made available through your competition and adjust your underwriting accordingly?

 

This article will deal with personal auto but can easily be applied to other lines of insurance.

 

Back in the 1960’s and early 1970’s personal auto rating was easy. Most companies (through the service organization filings) used 11 classes to rate liability insurance and 7 classes to rate physical damage insurance. With the then new availability of electronic rating processes in the mid 1970s, the Insurance Services Office, Inc. (“ISO”), based on the statistics received from its participating companies, developed the 260 Class Plan. That Class Plan had 260 different classification factors to be used to rate personal auto insurance. Generally the same classification factor would apply to the liability coverages under the policy and a different factor could apply to the physical damage coverages. 

 

Over the years ISO modified that rating system and actually reduced the number of different classification factors but never back to the 18 class system in use in the 60’s and prior. Individual companies have modified their own systems over the years to include mileage, speed levels, radius of operation, credit scores, and a multitude of different discounts and surcharges. “UBI” or “usage based insurance” is now the upcoming analytical system with different factors based on mileage ranges and based on driver habits.

 

Now ISO has, based on statistical data, modified its personal auto class plan, in part, to have factors by coverage expanding the number of its classification factors substantially. Their filing of the “Enhanced Classification Plan” started becoming effective in states on April 1, 2014. ISO now has at least 890 classification factors (according to my count) in its personal auto rating system.

 

ISO’s new system has:

 

·         Separate rating relativities for normal rating, and for the Safe Driver Insurance Plan, for:

 

o   BI and PD Liability

 

o   Single Limit Liability

 

o   PIP and Med Pay

 

o   Comprehensive

 

o   Collision

 

·         Separate rating relativities for age.

 

·         Multiplicative rating relativities instead of additive relativities.

 

·         Separate factors are being introduced for accident surcharges for BI and PD only accidents based on the number of accidents.

 

·         Violation surcharges are being introduced for major and minor violations.

 

·         The years licensed rating structure is enhanced with factors separated for youthful operators and all other operators.

 

·         A surcharge forgiveness rule is introduced for certain minor convictions and PD only accidents.

 

·         Primary and secondary classification factors are shown with:

 

o   A mileage component

 

o   Married/single rating variables for all ages

 

o   Gender rating variables for all ages

 

The new ISO Enhanced Personal Auto Classification System can have substantial impact on a company’s policy administration and rating systems. It can multiply the number of Loss Cost Multipliers used. It will have impact on STAT Plans, Underwriting, Rating Information Forms, Applications, and Agent Education. 

 

What happens if your company does not use ISO’s new enhanced personal auto classification system or something equivalent to that system. The simple answer is that for some (perhaps many) risks of a company – based on statistics alone – the risks are not charged enough. Or risks receive a higher rate than a risk insured with another company using the enhanced classification system. If you have a large number of risks where your charge is insufficient (when your premium is compared to a company’s using the enhanced classification system) you could lose money. You get the risks which don’t go to other companies charging an actuarially sufficient premium. If you have a large number of risks where your premium is too high – if those risks look elsewhere for coverage – you could lose what may have been profitable business. 

 

To some extent this is where knowledgeable underwriting comes into play. If the company’s rating system is not as broad as the competition, does the company’s underwriting (and perhaps its perception and/or history) compensate by keeping profitable risks? Does your filed (and approved) rating system allow an underwriter to adjust premium as appropriate? That could be through a minor modification to a service organization’s filing.  Or, do you have coverage enhancements filed and approved so that an agent can sell your company based on broader coverage to recognize minor premium modifications?

 

As the use of the internet and rating system comparisons expands, risks will be conducting more research on possible premiums with different companies. In fact, some risks which may have not been acceptable in the past (given claims history) could even be acceptable to a company if rates reflected the exposure. 

 

To counteract the selling based only on premiums, does your website explain how you may be providing broader coverage than the competition? While lower premiums can “sell” a company for some insureds, others will look at the rating of the company, the coverage being provided, and how it rates on claims handling.

 

Actuaries keep discussing the need to use analytics in the industry based on statistics. Theoretically that is correct. However, implementation of new and/or enhanced rating programs can be very expensive.

 

 It is best to understand the use of analytics and its possible impacts on a company. Informed underwriting is at issue. Your company may not have the money to invest in enhanced systems (now) to have 1,000 plus classification factors. But have you taken all possible steps to compete with those which have enhanced systems? 

 

While this article discusses personal auto, the message can easily be expanded to other lines of insurance – know what the competition uses and plan accordingly!

 

 

 

Michael L. Averill, CPCU, MBA is the President of MLA Consulting, LLC. Mike’s career has seen employment at ISO, The Home, a company servicing Lloyd’s MGA business, as the Assistant Commissioner in New Hampshire, and for the last 12 years as a consultant. Mike can be reached at 603 714 0844 or at Mike@mlaconsulting.com.

 

 

 

KEEPING UP WITH THE JONES’

 

Has your company kept up with the use of analytics in rating? Do you follow the filings of a service organization? Do you enhance your own rating schemes?  Do you know what might happen if you do not follow what is made available through your competition and adjust your underwriting accordingly?

 

This article will deal with personal auto but can easily be applied to other lines of insurance.

 

Back in the 1960’s and early 1970’s personal auto rating was easy. Most companies (through the service organization filings) used 11 classes to rate liability insurance and 7 classes to rate physical damage insurance. With the then new availability of electronic rating processes in the mid 1970s, the Insurance Services Office, Inc. (“ISO”), based on the statistics received from its participating companies, developed the 260 Class Plan. That Class Plan had 260 different classification factors to be used to rate personal auto insurance. Generally the same classification factor would apply to the liability coverages under the policy and a different factor could apply to the physical damage coverages. 

 

Over the years ISO modified that rating system and actually reduced the number of different classification factors but never back to the 18 class system in use in the 60’s and prior. Individual companies have modified their own systems over the years to include mileage, speed levels, radius of operation, credit scores, and a multitude of different discounts and surcharges. “UBI” or “usage based insurance” is now the upcoming analytical system with different factors based on mileage ranges and based on driver habits.

 

Now ISO has, based on statistical data, modified its personal auto class plan, in part, to have factors by coverage expanding the number of its classification factors substantially. Their filing of the “Enhanced Classification Plan” started becoming effective in states on April 1, 2014. ISO now has at least 890 classification factors (according to my count) in its personal auto rating system.

 

ISO’s new system has:

 

·         Separate rating relativities for normal rating, and for the Safe Driver Insurance Plan, for:

 

o   BI and PD Liability

 

o   Single Limit Liability

 

o   PIP and Med Pay

 

o   Comprehensive

 

o   Collision

 

·         Separate rating relativities for age.

 

·         Multiplicative rating relativities instead of additive relativities.

 

·         Separate factors are being introduced for accident surcharges for BI and PD only accidents based on the number of accidents.

 

·         Violation surcharges are being introduced for major and minor violations.

 

·         The years licensed rating structure is enhanced with factors separated for youthful operators and all other operators.

 

·         A surcharge forgiveness rule is introduced for certain minor convictions and PD only accidents.

 

·         Primary and secondary classification factors are shown with:

 

o   A mileage component

 

o   Married/single rating variables for all ages

 

o   Gender rating variables for all ages

 

The new ISO Enhanced Personal Auto Classification System can have substantial impact on a company’s policy administration and rating systems. It can multiply the number of Loss Cost Multipliers used. It will have impact on STAT Plans, Underwriting, Rating Information Forms, Applications, and Agent Education. 

 

What happens if your company does not use ISO’s new enhanced personal auto classification system or something equivalent to that system. The simple answer is that for some (perhaps many) risks of a company – based on statistics alone – the risks are not charged enough. Or risks receive a higher rate than a risk insured with another company using the enhanced classification system. If you have a large number of risks where your charge is insufficient (when your premium is compared to a company’s using the enhanced classification system) you could lose money. You get the risks which don’t go to other companies charging an actuarially sufficient premium. If you have a large number of risks where your premium is too high – if those risks look elsewhere for coverage – you could lose what may have been profitable business. 

 

To some extent this is where knowledgeable underwriting comes into play. If the company’s rating system is not as broad as the competition, does the company’s underwriting (and perhaps its perception and/or history) compensate by keeping profitable risks? Does your filed (and approved) rating system allow an underwriter to adjust premium as appropriate? That could be through a minor modification to a service organization’s filing.  Or, do you have coverage enhancements filed and approved so that an agent can sell your company based on broader coverage to recognize minor premium modifications?

 

As the use of the internet and rating system comparisons expands, risks will be conducting more research on possible premiums with different companies. In fact, some risks which may have not been acceptable in the past (given claims history) could even be acceptable to a company if rates reflected the exposure. 

 

To counteract the selling based only on premiums, does your website explain how you may be providing broader coverage than the competition? While lower premiums can “sell” a company for some insureds, others will look at the rating of the company, the coverage being provided, and how it rates on claims handling.

 

Actuaries keep discussing the need to use analytics in the industry based on statistics. Theoretically that is correct. However, implementation of new and/or enhanced rating programs can be very expensive.

 

 It is best to understand the use of analytics and its possible impacts on a company. Informed underwriting is at issue. Your company may not have the money to invest in enhanced systems (now) to have 1,000 plus classification factors. But have you taken all possible steps to compete with those which have enhanced systems? 

 

While this article discusses personal auto, the message can easily be expanded to other lines of insurance – know what the competition uses and plan accordingly!

 

 

 

 

 

 

 

 

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