Cris Carlson m0606 Recent Evolution 1

Recent Evolution in Non-Life Insurance in the USA : 

Recent Evolution in Non-Life Insurance in the USA Christopher S. Carlson, Pinnacle Actuarial Resources, Inc. Fellow of the Casualty Actuarial Society, Member of the American Academy of Actuaries

Recent Evolution in Non-Life Insurance in the USA: 

Recent Evolution in Non-Life Insurance in the USA Regulation of Rates in the US Property Lines – Catastrophe Exposures Auto (Motor) Insurance Property Lines – Non-Cat Exposures

Regulation of Rates in the USA: 

Regulation of Rates in the USA Individual State Regulation of Rates Four Styles of Regulation Prior Approval File & Use Use & File Open Competition National Data Collection Agencies develop advisory loss costs with standard rate plan

American Insurance Market: 

American Insurance Market Many participants Company Groups writing in the US Personal Auto 308 Homeowners 286 Dominated by few large National Insurers

US Homeowners Insurance: 

US Homeowners Insurance

Property Lines  Various USA Catastrophe Exposures: 

Property Lines Various USA Catastrophe Exposures Hurricane Tornado Hail Storm Earthquake * Winter Storm * Some Government involvement Terrorist Attack * Riot * Mold Flood * Sinkhole - Florida

Property LinesCatastrophe Exposures: 

Property Lines Catastrophe Exposures Wake Up Call 1989 – Hurricane Hugo & Loma Prieta EQ 1992 – Hurricane Andrew 1994 – Northridge Earthquake More Recent Enlightenments 2004 – 4 Major Hurricanes 2005 – Hurricane Katrina – Wind and Water

Hugo Travels Well Inland: 

Hugo Travels Well Inland

Loma Prieta Earthquake Damage in San Francisco Area: 

Loma Prieta Earthquake Damage in San Francisco Area

Hurricane Andrew levels complete neighborhoods: 

Hurricane Andrew levels complete neighborhoods

Property LinesCatastrophe Exposures: 

Property Lines Catastrophe Exposures Early 1990s Introduction of output from Hurricane Catastrophe Models to replace limited amount of historic hurricane experience in rate development More attention to exposure accumulation Use of Earthquake model in California State EQ Program rates Restriction of coverage - mold

Wind and Water Damage from Hurricane Katrina: 

Wind and Water Damage from Hurricane Katrina

New Orleans Underwater: 

New Orleans Underwater

Mississippi Rescue from Storm Surge: 

Mississippi Rescue from Storm Surge

Mississippi Homes after Katrina Damage caused by wind or water?: 

Mississippi Homes after Katrina Damage caused by wind or water?

Property LinesCatastrophe Exposures: 

Property Lines Catastrophe Exposures More recently (2004 and beyond) Increased scrutiny of model input – output Greater attention to exposure accumulation and the risk of ruin Use of severe thunderstorm (tornado/hail) and winter storm models in rate development Appreciation of storm surge especially since flood is not a covered cause of loss in the Homeowners policy Flood Insurance sold by US Governmental agency

Catastrophe Models: 

Catastrophe Models Brings the expertise from a number of disciplines such as: Meteorology (weather) Structural Engineers (building) Oceanographers (storm surge) Seismologists (earth movement) Statistical modelers (Monte Carlo simulation and other simulation techniques) Actuaries required to understand modeling process rather than blindly adopt output

Personal Auto (Motor) Coverages: 

Personal Auto (Motor) Coverages Six major coverages Liability (3rd Party Coverage) Bodily Injury (BI) Property Damage (PD) Physical Damage (1st Party cover of auto) Collision Other than Collision (Comprehensive) 1st Party Medical – State Dependant Medical Payments Personal Injury Protection (PIP) Uninsured Motorist Coverage (UMC)

Personal Auto (Motor) Insurance: 

Personal Auto (Motor) Insurance Pre Mid 1990s Fairly consistent rating plans among insurers (rate bureau standard) Sharing of Risk philosophy Univariate review of rating variables Competition based upon price and service

Personal Auto Insurance: 

Personal Auto Insurance Post Mid 1990s (Progressive Impact) Widely differing rating plans Attempt to more closely match exposure with future risk using predictive models Multivariate analysis of rating variables Introduction of policyholder financial responsibility as a rating variable Competition based upon segmentation of market

Personal Auto Insurance: 

Personal Auto Insurance Change from Causality to Correlation Introduction of more inter-variable correlations # of cars vs. # of drivers Current and prior liability limits Liability factors based upon car driven Increase distinction within old structure Rates by age of driver (more continuous) Territories based on zip code

Financial Responsibility Rating: 

Financial Responsibility Rating Based on person’s prudent use of credit rather than the available amount Uses a number of credit related variables such as: # of credit cards and revolving accounts Amount of balances more than x days old # of late payments in past y months Bankruptcies or defaults Insurance Score based on Credit Usage Used in both Motor and Home

Homeowners Insurance: 

Homeowners Insurance Rating basis - “all perils combined” Rate based on characteristic of home Replacement or Market Value Location Distance to fire department and water source Age of structure Type of Construction (Frame, Masonry) Other coverages related to value of structure Contents Additional Structures Additional Living Expenses Liability Coverage included in basic policy premium

Property Lines Non-Catastrophe Exposures: 

Property Lines Non-Catastrophe Exposures Early 2000s Increased rate levels in search of adequacy Introduction of policyholder financial responsibility as a rating variable Historically rating based solely upon structure Now rating also takes into account who lives in the home.

Property Lines Newly Introduced Variables: 

Property Lines Newly Introduced Variables Amount of Insurance by Construction Class Multi-Line Discounts based on # of Auto Accidents & Violations Rates based on # of prior claims by Type of Loss or Size of Loss Presence of Attractive Nuisances Presence of Pets Pools Trampolines

Property Lines  Newly Introduced Variables: 

Property Lines Newly Introduced Variables Insured Specific Factors Named Insured Age Occupation Marital Status Number of Occupants Presence of Children Original Owner of home

Property LinesExpanded Rating Sequence: 

Property Lines Expanded Rating Sequence Separate rates for Hurricane or Wind perils Expansion to develop rates separately for Fire Theft Liability Non-catastrophic weather All other

Please Join Usat Disney World Resort®: 

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ASTIN 200720 - 23 June: 

ASTIN 2007 20 - 23 June