Commercial Package Pricing Rating & Product Development Considerations

2. Commercial Package PricingRating & Product Development Considerations Joanne Reitz The Hartford 2003 CAS Ratemaking Seminar

3. What is BOP? • Small commercial • Less than 20 employees • Less than 10-15M in sales • Package business • Bundled optional coverages

4. BOP Ratemaking Challenges • Rapidly expanding marketplace • New businesses (e.g., cellular phones, e-commerce) • New exposures (e.g.,mold, terrorism) • New exposures (e.g. religious and financial institutions) • Significant product & rating variations • Lack of true industry benchmarks • Complicates competitor analysis & marketing strategies • Continued coverage expansion & eligibility

5. BOP Product Development Profile “non-Bop” Book Monitor Success (New/ Conversion) Est. Product Goals Develop Filing Strategy & Gain Approvals Identify & Develop New Classes Develop Conversion & Transition Plan Identify & Develop New Coverage Develop Rating Approach & Rates

6. Profiling “non-BOP” book Class Coverage Pricing Product Goals Timeframe Automation contraints % book to convert Rating Methodologies Introduce new exposure bases Classes Rate Tiers Conversion Conversion Tier Goal: Limit Price Chg +/- 15% NOC class Actuarial Challenges

7. Transition Plan Guidelines Collect data on reasons not converted - future product enhancements Filing Strategy Visit with Regulators Monitoring Pricing Use of Tiers, Schedule -> problem with rate level or rating structure Use of conversion mod Use of NOC class Type of business (class or price) Use by Territory Actuarial Challenges

8. BOP Ratemaking • Use of Competitive analysis in ratemaking & pricing decisions • Surrogate for Industry Loss Costs • Formally introduced into ratemaking (i.e., as complement of credibility) • Informally used in rate/price decisions • Requires: • Selection of competitors as benchmarks • Overall pricing strategy

9. Territory definition Protection & construction groupings Rate groups vs. class rates * All risk loads Amount of insurance curves * Class rating becoming more common, even for building exposures High limit credits Split vs. single exposure rating (property vs. liability) Class eligibility & definitions Program eligibility (sales, limits, sq. ft.) Use of CPP instead of BOP BOP Product & Rating Variations

10. BOP Company Rating Formulas

11. BOP Rating Variations • While competitive analysis is essential, almost impossible to get to “target” rate level in every territory & class • Agent has a “portfolio” of companies & prices to choose from • Rating & pricing plans both • Help bridge gap • Complicate market pricing

12. Common BOP Rating & Pricing Plans

13. Sub-classifications Specific risk locations Number of years in Business Financial strength Economic trend for the specific business Unique carrier claim department competencies Alarm systems Guard or watchman Number of visitors on premises Employee training programs Employee turnover Formal safety and loss control programs Need for Pricing Tools For BOPRisk Characteristics not Reflected in Rating Variables

14. Predictive Power of Loss Experience

15. Predictive Power of Loss Experience • 85-90% of BOP’s have no prior losses • Loss History not a discriminating pricing tool • Loss History strong underwriting tool • Loss ratio and claim frequency predicted to be significantly higher when prior loss activity

16. Use of Credit on Small Commercial • “Proven” for u/w selection and pricing in Personal Lines • Natural extension => small commercial • More overlap with existing u/w process (little or no l/r correlation on larger accounts) • Data availability (credit “hit” ratios) • Option: use of personal credit for sole proprietors

17. Predictive Power of Credit

18. Predictive Power of Credit • Strong correlation between credit and loss ratio • More discriminatory • 20+% of risks identified as better than average • 20+% of risks identified as worse than average

19. BOP Rating Plans • Rating tiers provide flexibility to address risk characteristics not found in rating plans • Lack of data impedes ability to quantify impact of various risk characteristics • The successful carriers will identify & price the “non-rating” variables

20. Other BOP Market Trends • Alternative distribution channels • Service centers, dedicated sales force, mass marketing, niche marketing, Internet, Banks • Let the customer choose the way they want to buy • Potential commission & expense reductions, flowing into more competitive products • Affinity Programs • Coverage “hooks”, preferred rate levels, dividend plans • Coverage expansion • Differentiate products • Pricing tool -> little/no charge

21. Optional CoveragesPremium Trend • Larger % of Liability Premium driven by introduction/growth of split rated programs (mfg, ctr) • Optional coverage premium has grown from 14% of total to over 20% in six years

22. Optional CoveragesLoss Trend • Despite more exposure in Optional coverages, losses associated with Optional coverages have stayed flat or slightly declined.

23. BOP Losses By Cause of Loss • No change in mix of losses by “major” coverage over past 6 years, dispite change in class mix

24. BOP Property Losses By Cause of Loss • Fire accounts for 40+% of Property losses • Slightly more losses due to Burglary & Theft • No other material shifts in C.O.L. over the 6 year period

25. BOP Liability Losses By Cause of Loss • Slip & falls accounts for 40% of Liability losses • Products account for 15% of losses • Only material change over 6 years is reduction in losses due to Adv & Per Injury

26. BOP Coverage Enhancements • Difficult to quantify impact of increased coverage on BOP loss costs • Coverage becomes a competitive issues • Helps reduce agents E&O exposure • Is there real value for the consumer? • Ratemaking challenges • Different exposure than “traditional” BOP coverages • A • Automation challenges • Underwriting intensity: More Information required

27. What’s new for BOP? • New Classes • New Exposures • New Coverages • New Optional Coverages • New Rating Approaches

28. BOP Product DevelopmentMoving farther away from the “typical” BOP exposure • New Classes • Technology • Financial Institutions • Educational Institutions • Religious Institutions • Miscellaneous • Property Only

29. Financial Institutions • Classes: • Savings & Loan • Investment Company • Mortgage Bankers • Finance Company – Personal • Finance Company – Commercial • Credit Unions • Banks & Other Financial Institutions

30. Schools & Educational Services • Classes Include: • Business & Professional Educational Services • Trade & Vocational Schools • Recreation, Leisure & the Arts Schools • Private Academic Institutions

31. Religious Institutions • Classes: • Churches and Other Houses of Worship • Cemeteries, Associated with a Church • Clergy Residence • Church Office (Separate Building) • Church Hall (Separate Building)

32. Other New Classes Include: • Art Conservator • Cable Laying for Computer Networks • Counter Top Manufacturer • Small Motor/Engine Repair • Vinyl Sign Manufacturer

33. Property Only Classes, including: • Detective Agency • Express Companies • Public Buildings • Sun Tanning Salons • Swimming Pool Installation

34. New Exposures • Terrorism • Mold

35. Additional Exposure Considerations • Computer & Media Equipment • Data, Software & Programming • Auto Liability • Workers Compensation • Special Events

36. New Coverages Packaged as Options or Built in at Low Limits: • EPLI • E&O • D&O • Blanket Limits • International

37. New Optional Coverages Actual Loss Sustained Business Income - Specified Limit • Fixed Dollar Limit • Determined based on Percentage of Sales • Mandatory for classes with higher potential for rapid growth

38. Q&As