By-Peril Rating Plan Advances More Precise Homeowners Rating

By Haig Artan

The pricing of homeowners insurance, traditionally a matter of averaging all risks, is becoming more precise and customized to the individual risk.

Insurers are taking advantage of new technologies and a growing body of detailed data available on home construction types, various hazards and geographic locations to develop prices that reflect more of an individual home’s own risk.

This trend received a boost recently when a group that develops policy forms and supplies underwriting information to property/casualty insurers released a by-peril rating product that brings more individualized rating within ready reach of hundreds of insurers.

The American Association of Insurance Services (AAIS) has filed its Homeowners By-Peril Rating Plan in about half the states already and is aiming to have it filed in all the rest soon. AAIS has more than 700 property/casualty members but any insurer can affiliate to use the Homeowners By-Peril Rating Plan.

Traditionally homeowners products have been priced on a composite basis, but today the property/casualty industry is adopting more granular rating of risks, said Paul Baiocchi, president and chief executive officer of AAIS.

“Now we have the capabilities of looking at a much more refined rating plan,” he said. “We can look at the causes of loss and assign a loss exposure to that particular level.”

AAIS and individual insurers do not like to reveal too much about the variables they use in their rating plans. The AAIS by-peril plan lists base loss costs and rating factors for 10 different catastrophe and non-catastrophe perils, including rating information for several new variables. The catastrophe perils include tornado and fire following earthquake and hurricane; the five non-catastrophe perils include fire and wind.

To build the program, AAIS said it has used its own statistical database of several billion in annual homeowners premium and data from two catastrophe models. It has also acquired additional demographic, climate and geographic data.

“We have some pretty powerful tools at our disposal,” said Baiocchi. “We are bringing together a lot of data – a lot of actuarial statistical data and management expertise, all tied back again to the knowledge and expertise that AAIS can offer.”

“It’s an important evolution because in the past much of this had to be rated in a composite fashion,” said Joseph Harrington, director of corporate communications for AAIS. “Now there is a lot more information available that allows companies to be more refined and precise.”

The program is meant to supplement whatever pricing approach insurers are already using. It allows them to input their own rating variables.

“We have paid a great deal of attention to the architecture of the rating plan to facilitate automation and to make it easy for companies to modify or to overlay their own rating variables,” said Baiocchi. “In that sense, we have developed what we like to call a ‘smart’ rating plan.”

According to Harrington, the plan provides benefits beyond homeowners policy rating.

“It is a tool for analyzing your book of business and how well your premium matches your risk and where you are located,” Harrington said. “It can also help insurers when they go to purchase reinsurance because it paints a more precise picture of what they need and where they need it. Even if you didn’t use the plan to rate policies, those benefits alone would be very valuable.”

AAIS believes that this is just beginning and that rating plans like this will become more popular.

“We think this is certainly the way the industry is going for other lines of insurance, not just homeowners,” said Baiocchi. “Carriers are introducing highly refined rating plans and this is moving in that direction.”

Thus, AAIS is looking at expanding the rating plan concept to other lines of business as well.

“We are essentially taking this contact in slightly less detail to other lines of business; that is on the drawing board now,” said Baiocchi. “We are considering a similar type of refinement for business owner products and other monolines of business, whether it be standalone fire or commercial lines. For other lines we are somewhat well advanced into planning and development but not ready to move forward on making filings.”

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