Auto Class Plan Filings

1
Auto Class Plan Filings

• Presented by
• Nancy P. Watkins, FCAS, MAAA
• Susan M. Miller, FCAS, MAAA
• Milliman, Inc.

ACIC General Counsel Seminar July 25, 2008
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ARF is about Auto Rating Factors
ARF Filing Deadline July 14, 2008
3
What Did Companies Do?
4
Rate Filing Activity 2006 to Present
Not much rate activity until first ARF deadline
Then, most companies took decreases
Approved changes were lower than requested
Source www.ratefilings.com. Excludes
motorcycles, specialty vehicles, motorhomes, etc.
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What are Companies DoingTo Reach Class Plan
Compliance?

• We selected 8 auto insurance companies from the
  top 15 writers in California about 50 of the
  market.
• We reviewed the most recent ARF class plan
  filings for each company. Not all are at final
  full compliance.
• This is what we saw. . .

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What Did Companies Do?
Factor Weight (importance)
Mandatory
Pumped mandatory variables (especially mileage
and years driving experience)
3 of 8 Companies Chose This Approach
Each Optional
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What Did Companies Do?
Factor Weight (importance)
Mandatory
Tempered non-compliant variables (especially
territory)
6 of 8 Companies Chose This Approach
Each Optional
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What Did Companies Do?
Factor Weight (importance)
Mandatory
Separated an existing variable into two
variables, thus distributing the weight
One Optional
2 of 8 Companies Chose This Approach
Two Optionals
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What Did Companies Do?
Some companies restructured territory definitions
to shift the distribution of zip codes within
each territory, decreasing weight by
concentrating policies closer to the middle
low
average
high
6 of 8 Companies Chose This Approach
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What Did Companies Do?
Also, companies were allowed to increase
the number of territories from (10 x 10) to (20 x
20)
zip
zip
low
high
6 of 8 Companies Chose This Approach
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What Will We Face in the Market?

• Customer Dislocation
• Subsidized Risks
• Rate Pressure Soft Market
• Mileage Issues

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Customers are Dislocated
0 Rate Change
These seven companies represent about 45 of the
market.
Source Exhibit 9 of selected class plan filings
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Some Rates are Subsidized
Regulatory constraints on class plan lead to
over-reliance on some variables (mileage) and
under-reliance on others (territory).
Nearly flat indication (yellow) implies that
mileage lt 15,000 should get no credit
Compliance line (green) shows subsidy of as much
as 40
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Some Rates are Subsidized
Regulatory constraints on class plan lead to
over-reliance on some variables (mileage) and
under-reliance on others (territory).
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Third, Measure Market Size of Each Segment
Profitable Competitive
Unprofitable Competitive
J
B
F
H
A
Competitiveness
Unprofitable Uncompetitive
D
G
C
E
Profitable Uncompetitive
I
Profitability
Note sample data
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Summary

• Next 30-60 days, more will become evident about
  what companies filed.
• It will take longer for approvals.
• Expect the market to be chaotic, and some rates
  to be actuarially unsound.
• The competitive landscape is certain to have
  changed. Segmentation analysis can facilitate a
  companys understanding of areas of
  profitability, competitiveness and opportunity.
• Over the long term, class plans can be improved.
  Companies that focused first on becoming
  compliant can now work toward more
  optimally-structured plans.