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)

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?

3
Possible New Homeowner Rating Plans

• Driver Profile
• Claims Rating
• Retired Discount

4
Areas of Consideration for New Rating Plans

• Objectivity
• Causality
• Practicality Cost-Effectiveness
• Data
• Reclassification
• Public Acceptability

5
Driver Profile

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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

6
Driver Profile

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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?

7
Driver Profile

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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

8
Driver Profile

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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?

9
Claims Rating

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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

10
Claims Rating

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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?

11
Claims Rating

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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?

12
Claims Rating

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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

13
Claims Rating

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• Reclassification
• Claims will naturally age out of the experience
  period
• How should a customer moving to a new residence
  be handled?

14
Claims Rating

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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

15
Retired Discount

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• Objectivity
• Consider how age might be used in defining
  retired
• Consider how employment may be used

16
Retired Discount

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• 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?

17
Retired Discount

• Objectivity
• Causality
• Practicality
• Data
• Reclassification
• Public Acceptability

• Reclassification
• How does retired status change?
• Public Acceptability
• Fairness/Relevancy
• Privacy issues

18
References

• American Academy of Actuaries
• Risk Classification Statement of Principles
• Actuarial Standards Board
• Actuarial Standard of Practice 12 Concerning
  Risk Classification