COM-2 PRODUCT DEVELOPMENT CAS Ratemaking Seminar, New Orleans March 11, 2005 Dave McLaughry, FCAS, MAAA Senior Actuary and Product Manager Farmers Insurance Group

Entering New Personal Lines Markets Expanding into a new state Launching a new product line Entering a new distribution channel

Outline The challenges Laying the groundwork Claims/Underwriting/Marketing Pricing/Reserving Implementation Tracking Early Experience

Entering New Markets - The Challenges: Lack of applicable premium/loss experience Untested data collection processes Weak understanding of competition Nonexistent/immature claims organization Underwriters inexperienced in the new market

Entering New Markets - The Challenges (cont.): Lack of familiarity with product nuances Local peculiarities: legal venue, weather, construction practices, etc. New regulatory environment! Knowledge gained from other markets is easy to misapply

Laying the Groundwork Build a model including all costs, allow for contingencies Develop clear expectations and reasonable timeframes Test using pilot program before making large investment Build processes for accurate data collection Measure everything

You mean we have to pay Claims? Major cause of poor early performance - indemnity and expense Build staff in-house or outsource? Experienced staff and market-specific knowledge is key Establish clear standards of performance early on Document retrieval process

Underwriting - Friend or Foe? Staff adequately; allow for low efficiency early on Keep a firewall between underwriting and marketing Be generous with investigative reports - you need all the help you can get Fully research market specific requirements

Marketing with Restraint Know what your target market is Don’t sell on price Overly aggressive sales goals are a recipe for failure Cap production to stay in line with u/w, claims capacity Beware of the underwriting cycle!

Pricing in a Partial Vacuum Experience from similar markets may be considered, if applicable If you have no historical experience - Why not use competitor data to set rates?

The Perils of Competitor Rates What could go wrong ? Credit models Underwriting Black box tiering Driver assignment Customer base Contract differences Product bundles Data validation

The Perils of Competitor Rates (cont.) Are they able to grow and make money? How closely can you mirror a responsible competitor? Be at least as sophisticated as they are - its their neighborhood! High conversion rates are a leading indicator of trouble ahead

Reserving in a Total Vacuum Use pegged loss ratios to start with Key considerations as experience unfolds –Earned premium growth pattern –Stated claims procedures –Maturation of claims organization –Market peculiarities (reporting patterns, severity, tort thresholds, UM statutes) –Applicability of related markets –Reserve-to-paid ratios Take the heat for high IBNR loads

Implementation - taking the plunge... Have an exit plan - avoid the Roach Motel syndrome Have a plan to revise rates before experience is available If possible, pilot on a small scale first –Utilize manual processes –File and use state –Limited distribution

Tracking Early Experience Ignore calendar period results Understand growth patterns –Earned premium –Reported claims –Paid Severity –Case reserves –Front-loaded expenses (commissions) –Costs that lag (residual market, LAE, some taxes) –Accounting practices for O.A. and G.E. vary

Tracking Early Experience (cont.) Track semi-reliable early indicators –PD frequency/industry severity –# claims/$1,000 premium –Short-tailed coverages (PD, coll, PIP) Impact of “new business penalty” Skewed distribution of early customer base

Entering New Markets - Measuring Success Identify which metrics are reliable Measure vs. model, not traditional financial indicators Exceeding early growth goals is usually a bad sign

Questions??