The Homeowner as the Risk

1. The Homeowner as the Risk Becky Orsi, FCAS, MAAA Allstate Insurance Company 2001 CAS Ratemaking Seminar Las Vegas, Nevada -- March 13, 2001 Session: Emerging Issues in Homeowners Insurance Ratemaking (PROP-40) 2001 CAS Ratemaking Seminar

2. Auto versus Homeowners Ratemaking • Auto: • Traditionally we think of the driver as the risk for liability coverage and in some cases for physical damage as well • We insure the car, but rate on the driver • Homeowners: • The house is the risk to be insured • What if we view the homeowner as the risk instead of the house? 2001 CAS Ratemaking Seminar

3. Possible New Homeowner Rating Plans • Driver Profile • Claims Rating • Retired Discount 2001 CAS Ratemaking Seminar

4. Areas of Consideration for New Rating Plans • Objectivity • Causality • Practicality & Cost-Effectiveness • Data • Reclassification • Public Acceptability 2001 CAS Ratemaking Seminar

5. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Driver Profile • Objectivity = specifically determinable facts and not easily manipulated • How can this information be used in an objective manner for homeowners insurance? • Example of external, non-insurance data • Consider how to handle insureds for whom driver information is not available 2001 CAS Ratemaking Seminar

6. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Driver Profile • Causality • No need for cause-and-effect relationship • Must use information that is reasonable and not “obscure and irrelevant” • Practical Questions: • Cost of obtaining driver profile information • New and existing business • Is communication to the customer needed? 2001 CAS Ratemaking Seminar

7. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Driver Profile • Data: • Is the source of the information reliable? • If the customer disputes the information, how will this be handled? • Reclassification • Should external data be periodically re-evaluated & the book re-classified? • Actuarial question & practical question • Possibly a regulatory issue 2001 CAS Ratemaking Seminar

8. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Driver Profile • Public Acceptability • Does the plan differentiate unfairly among risks? • Relevancy of external data for rating may need to be addressed with the public • Privacy issues • Will a risk identify naturally with his/her classification? 2001 CAS Ratemaking Seminar

9. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Claims Rating • Objectivity = specifically determinable facts and not easily manipulated • To do this, a consistent definition of a chargeable claim must be created • Both new and existing customers should be considered 2001 CAS Ratemaking Seminar

10. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Claims Rating • Causality • No need for a cause-and-effect relationship • However, relationship of past claims to future experience is reasonable and not “obscure and irrelevant” • Is the predictive relationship stronger for some types of claims than others? 2001 CAS Ratemaking Seminar

11. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Claims Rating • Is it practical to implement Claims Rating? • Implement retrospectively or prospectively for existing business? • Cost of obtaining claim data • Multiple dwellings • Whose claim history will be used? 2001 CAS Ratemaking Seminar

12. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Claims Rating • Data Issues • New business -- An outside data source for claim history is needed • Existing business -- There is a need to link the rating algorithm with past claims history 2001 CAS Ratemaking Seminar

13. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Claims Rating • Reclassification • Claims will naturally “age out” of the experience period • How should a customer moving to a new residence be handled? 2001 CAS Ratemaking Seminar

14. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Claims Rating • Public Acceptability • Does the plan differentiate unfairly among risks? • Relevancy of prior claim data may need to be addressed • Both issues are related to nature of Homeowners claims 2001 CAS Ratemaking Seminar

15. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Retired Discount • Objectivity • Consider how age might be used in defining “retired” • Consider how employment may be used 2001 CAS Ratemaking Seminar

16. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Retired Discount • Causality • Is being retired “relevant” to Homeowners risk classification? • Practicality/Data Issue • How do you obtain age and retirement status for existing book of business? 2001 CAS Ratemaking Seminar

17. Objectivity • Causality • Practicality • Data • Reclassification • Public Acceptability Retired Discount • Reclassification • How does “retired” status change? • Public Acceptability • Fairness/Relevancy • Privacy issues 2001 CAS Ratemaking Seminar

18. References • American Academy of Actuaries • Risk Classification Statement of Principles • Actuarial Standards Board: • Actuarial Standard of Practice #12: “Concerning Risk Classification” 2001 CAS Ratemaking Seminar