Actuarial Consulting

Congratulations! You just got that ever-elusive rate increase approved. And much like the insurance cycle that alternates between a soft market and a hard market, you’re likely now shifting your focus from profitability to growth. However, given the time lags built into filing for rate increases and the challenges associated with recent market conditions, those new rate levels may already be outdated.

You should continuously evaluate your book of business to monitor both macro and micro trends to facilitate your drive toward profitable growth. This blog delves into questions our actuarial consulting team recommends you should be asking yourself immediately after your new rate levels are released to ensure you’re meeting your targets relative to profitability and growth. Though we examine this issue through a homeowners insurance-specific lens, the principles apply to all lines of business.

GROWTH

What are your growth goals?

A growth analysis should start with identifying your target market and evaluating key performance indicators like year-over-year growth and real-time book composition evaluations. More important is to identify how your growth compares relative to competitors and whether you can access untapped markets to grow your customer base.

For example, demographic changes or quote activity may highlight that certain areas have an increasing percentage of new construction homes. Similarly, underserved markets, such as secondary/seasonal homes or properties with prior claims that have been fully mitigated, may be easily won given the limited competition stemming from recent market constriction. Either situation offers the opportunity to target customers unidentified by your competitors.

How do you measure whether you are meeting your growth goals?

Impacts to conversion rates and retention rates stemming from rate increases can be predicted by evaluating the elasticity of the market. While changes to policy counts may appear extreme, changes to premium tie better to profitability and could make rate proposals more palatable.

Also, monitoring rate change implementations ensures that rates released to a production environment align with those presented in an approved rate filing. Strategies like these ensure that rate adjustments drive long-term growth as expected and in a compliant and profitable manner.

How can you act to better meet your growth goals in the future?

Once you understand your target market and your competitors’ performance, you’re well-suited to identify customers to fuel growth. There may be distribution-specific nuances to consider to ensure your rate levels don’t appear artificially high or low, such as when and how you default to actual cash value or replacement cost coverage on a roof.

Analyses of the insurance market, competitor quoting platforms, and demographic data can help you identify how you can tailor your product offering to better grow and serve your customer base. Working with actuarial consulting experts like the team at Perr&Knight can help.

PROFITABILITY

What are your profitability goals?

A profitability analysis should start with a review of key performance indicators like loss ratios, expense ratios, and combined ratios. Even better is to benchmark these metrics against competitors to place your performance in an industry context. Once you understand how others in your same distribution channel, target market, and geographic footprint perform, you can better understand where you want to fit within the market and what profits are attainable.

How are you measuring whether you’re meeting your profitability objectives?

Actuarial indications should be supplemented with items like inflation indices and industry net trends to gauge how profitable the program is within the market. For example, replacement cost recalculations at renewal accurately recognize cost inflation of labor and materials for repairs. You can also segment your book of business to identify problem areas, such as exposure to homes with older roofs or significant fencing in wind-prone areas. Once identified, you can address these problems through improved pricing or underwriting to improve profitability.

How can you act to better generate more profits going forward?

You are not the only one taking action in this challenging market. Your company may be nonrenewing homes with prior water claims, while another is declining homes partially covered by trees.

Identifying competitor actions, anticipating the evolving customer base, and adjusting pricing or underwriting are vital to avoid scenarios of adverse selection that could undermine your profitability goals.

Consistent evaluation is key

Profitability and growth are metrics that must be placed within the context of the market and evaluated consistently, especially after the release of a product change. By identifying your goals and implementing data-based solutions to meet those goals, you can increase confidence in your performance, even in a challenging market like the current homeowners insurance industry.

Though this blog focused on homeowners insurance, the principles apply to all lines of business. The actuarial consulting experts at Perr&Knight can help you identify what questions you need to be asking, how to find answers to those questions, and how to act on those answers to ensure your rate levels are consistently up-to-date and to facilitate your drive toward profitable growth.

Contact Perr&Knight today to discuss how our experts can help your company achieve your growth and profitability goals.

This past summer, as I stepped into the offices of Perr&Knight in Jersey City, I couldn’t help but feel a wave of excitement and anticipation. Securing an internship here was a dream come true—a chance to immerse myself in the professional world I was eager to join.

As a Business Marketing student at Northeastern University, I’ve always sought opportunities that would not only challenge me but also enhance my personal and professional growth. My internship at Perr&Knight did just that. Situated in the bustling environment of their Jersey City office, I found myself right in the heart of corporate dynamics, surrounded by professionals who were masters of their craft.

One of the unique aspects of my internship was the office culture. The casual office lunches were not just meals; they were my window into the lives and experiences of my colleagues. These gatherings, along with a memorable crew event for the Northeast region—complete with a competitive game of bingo and delicious catered food—helped me connect with team members not just in my office but across the region. Although I missed winning at bingo by just one number, the laughter and camaraderie made it a winning experience in every other way.

Professionally, I was positioned under the guidance of Kyle Hales in Perr&Knight’s Risk Strategies & Solutions practice area. This placement allowed me to collaborate across multiple departments, tackling a variety of tasks that broadened my understanding of our industry. A significant project for the state of Arkansas taught me a valuable lesson: most business problems in the actuarial consulting industry require creative, nuanced solutions. This project, like others, pushed me to refine my technical skills, particularly in PowerPoint and Excel. The need to produce client-ready deliverables accelerated my learning, turning initial struggles into skills on which I now pride myself.

The interaction didn’t stop at internal meetings. I frequently communicated with clients—ranging from newcomers with fresh insurance product ideas to seasoned clients requiring regular updates. These interactions were not just transactions; they were real relationships being built, providing me with invaluable experience in professional communication.

Reflecting on these three months, the lessons I’ve learned extend beyond technical skills. The nuances of professional life—such as the importance of detail in every deliverable and how one presents oneself in the workplace—were underscored daily. At Perr&Knight, I learned that professionalism isn’t just about how you dress or how much you know about your work; it’s about embodying confidence and competence in every interaction, truly taking the extra initiative to fully understand and address a client’s needs.

As I look back, I realize that my internship was not just about learning to navigate the corporate world; it was about discovering how to open doors to future opportunities through hard work, creativity, and a genuine commitment to excellence. At Perr&Knight, I didn’t just observe; I participated, grew, and left with a blueprint for my future career.

Michael Jordan once said, “You miss 100% of the shots you never take.” Taking on a role as an intern at Perr&Knight would not have been possible without taking that leap of faith. From exciting work events that I helped organize to interesting project work, my internship has provided me with valuable opportunities to evolve and develop both personally and professionally in a very short amount of time.  

The Interview

I researched Perr&Knight before I considered applying, learning about the types of work the actuarial consulting firm does, and getting a sense of the company’s values. I admired their strong commitment to their clients and the high level of service and expertise provided. On the day of my interview, I was even more impressed by how professional the people that I met in person were. I could see myself working with this team! When Perr&Knight contacted me later, I was thrilled to be chosen for the role.

Day in the Life

My daily activities include maintaining the digital signage in all offices, as well as working directly with managers and directors on both short-term and long-term projects related to marketing, administration, accounting as well as human resources. I have also been involved in assisting with onboarding and employee promotions.

Contributing to different projects in a variety of departments also tested my skillset in real-time situations. For example, I organized an Italian cooking class for the team, which involved reaching out to multiple businesses to find a suitable host and setting up the date, time, and form of payment. The event itself was a lot of fun, with everyone making gourmet pizza and focaccia, as well as sampling different appetizers and wine. Everyone left with goodies to eat later at home! Additionally, I handled the research portion for an actuarial department in-person meeting, which involved calculating airfare, hotel, and other additional costs to discover the best possible location. It will be exciting to hear how the meeting went later this year!

My day concludes by checking in with my supervisor and asking any outstanding questions. I have been lucky to have had a great supervisor who was also a great mentor.

What I Learned

First and foremost, I gained valuable insights into business-to-business interactions in the insurance space, which was completely new to me. Being part of an actuarial consulting firm has allowed me to build my understanding of crucial topics such as state filings, regulatory compliance, and accounting. It provided a firsthand perspective on roles from actuaries to billing coordinators. I am surrounded by people who inspire and motivate me to work even harder towards my goals.

And no great story is complete without a great ending. I’m excited to share that I have been offered a full-time position with Perr&Knight as an Administrative Assistant! I know this outcome was unique, but I am happy that the feeling was mutual and that I’ll be able to start my career at a great company, where I already feel at home.

By: Alexander Brill and Juliann Schiano

New medical breakthroughs are creating higher demand for stop-loss coverage – a big opportunity for today’s insurers. With an appropriate understanding of state-specific regulatory requirements, settling on key decisions about coverages and exclusions, and partnering with a knowledgeable actuarial and product development firm, companies looking to provide this type of coverage can plan accordingly and accelerate speed-to-market.

Based upon recent nationwide product filing and support services experience with a couple of large insurance company clients, our expert actuaries and product development consultants have seen some key new healthcare and policy considerations that insurance companies should keep in mind when developing stop-loss products for employers.

Gene and Cell Therapy

Gene and cell therapy are new forms of treatment that can cost hundreds of thousands – sometimes millions – of dollars. This presents a unique challenge for stop-loss insurers since they predominantly use experience rating when developing rates. Prior experience will not capture these expensive new treatments, which have only been around for a few years. An experienced actuarial firm can assist in compiling and interpreting available data to develop accurate rates.

Coverage Period (Paid-Year vs. Incurred-Year Coverage Basis)

In response to customer demand, insurers increasingly provide stop-loss coverage on a paid-year basis – a significant difference from typical medical health plans.

In stop-loss insurance, the distinction between “paid-year” and “incurred-year” basis is crucial for determining when claims are covered. “Paid-year” basis covers claims paid within the policy year, regardless of when the underlying medical event occurred. This means that even if a claim is for an event that occurred during a previous year, it will be covered as long as the payment is made during the current policy year. On the other hand, “incurred-year” basis covers claims for medical events during the policy year, even if the actual payment is made after the policy year ends. The choice between these methods impacts how risks are managed and can affect premiums and coverage periods.

Insureds expecting high claims to be paid for medical treatments incurred in the prior year will likely request coverage on a “paid-year basis.” They are also more likely to be in the market for new stop-loss plans since they are aware of high-cost payments due in the upcoming year.

Lasering

Lasering (the practice of excluding individual members or certain treatments from coverage) is popular in part due to gene and cell therapy – but presents regulatory challenges. A dozen states prohibit lasering. An additional three states only allow lasering if the underlying medical plan allows lasering.

In Perr&Knight’s recent countrywide filing on behalf of our client, five additional states had objections, requiring the insurer to limit the use of lasering or give detailed explanations for examples of where lasering might be applied.

State-Specific Restrictions

Navigating the regulatory landscape for stop-loss products is a challenge, due to variations in requirements between states. Here are the most common state-specific issues for companies submitting countrywide filings:

• Small employer group regulatory requirements
• Run-in/run-out period requirements
• Underwriting guidelines
• Attachment point restrictions
• Lasering restrictions
• Group size restrictions
• Loss ratio restrictions

DOI Review Times

Certain states take much longer to review form and rate submissions, and are more likely to raise objections and require additional transmittals. It’s important to budget time appropriately with this in mind.

Medical Inflation/Refiling Rates

Medical inflation and rapid technological changes make it necessary to refile rates and rules every few years. Knowing when and how to update rates and/or rules in a cost-effective manner is important. Working with a seasoned actuarial firm like Perr&Knight is advantageous – our expert state filing teams can help companies be proactive about refiling.

Suggestions for Working with Actuarial and Product Design Consulting Partners

Partnering with experienced actuaries and product design consultants can help streamline product development and filing. Here are some useful suggestions to keep in mind before and during the development phase:

• Decide if your potential clients are large or small groups
• Prioritize the jurisdictions in which you will be filing
• Decide whether you are doing experience rating vs. manual vs. non-experience rating (note: all filings will incorporate pricing for both)
• Determine whether you want to cover gene therapy, as this will affect pricing
• Share whether or not you will use lasering. If so, your actuarial firm can provide appropriate guidance.

Contact the team at Perr&Knight today to learn more about stop-loss coverage.

In today’s volatile market, businesses often face the challenge of rising insurance premiums, which can significantly impact their bottom line. When the cost of insurance seems disproportionate to the value received, it’s crucial for companies to explore alternative risk management strategies. While the commercial insurance marketplace functions as a reasonably effective means to transfer insurance related risk, it is by no means a perfectly efficient model. Commercial insurance carrier expenses such as commissions, marketing, advertising, premium taxes and many overhead expenses are incorporated into the final premiums paid by policyholders, resulting in a deadweight loss to the risk transfer process.

Additionally, insurance companies price policies to cover the long-term average expected losses and charge a premium for the risk they assume (profit and contingency load/charge). The insurers use the risk premium to increase their capital and surplus over time to provide for funds needed in years with high claim costs that will deplete capital and surplus. By retaining more of the risk, the expense component and risk surcharge of the insurance premiums paid to carriers would be reduced or eliminated, potentially producing significant savings for the policyholder.

This blog delves into four viable options we have identified over decades of actuarial consulting: self-insuring, forming a captive insurance company, creating a risk retention group or risk purchasing group, and starting a traditional insurance carrier. Each option comes with its own set of pros and cons, which we’ll explore to help you make an informed decision. The ideal option depends on a multitude of variables, most importantly the size of the company.

Option 1: Self-Insuring

What Is Self-Insuring? Self-insuring occurs in various forms, including electing or increasing deductibles or self-insured retentions, increasing co-insurance/quota-share percentages, setting up a certified self-insured entity or self-funding risk – that is, not purchasing insurance coverages at all. Each option consists of a company setting aside its own funds to cover all or some potential losses rather than purchasing first dollar insurance from a third-party provider.

Pros:

• Cost Savings: Avoids and/or reduces the premium costs associated with traditional insurance.
• Simplicity: Options such as increasing deductibles or self-insured limits are very easy to implement and don’t require significant changes to the underlying insurance policy.

Cons:

• Financial Risk: Potential for significant financial exposure in the event of large or unexpected claims. This also increases the variability of the underlying company’s financial performance.
• Capital Requirements: May require substantial upfront capital to ensure sufficient reserves.

Option 2: Forming a Captive Insurance Company

What Is a Captive Insurance Company? A captive insurance company can take on various forms, the most common of which is a wholly owned subsidiary created to provide insurance to its parent company and possibly its affiliates. This entity operates like a traditional insurer but serves only the needs of its parent organization.

Pros:

• Customization: Ability to design insurance coverage tailored to specific business risks without the constraints of standard insurance policies.
• Cost Efficiency: Potential for long-term savings and profit from underwriting income.
• Risk Management: Improved risk management and loss prevention practices due to direct oversight.

• Tax Benefits: Potential for favorable tax treatment under certain conditions.
• Control: Direct control over claims handling and risk management.

Cons:

• Initial Costs: High setup costs and ongoing administrative expenses.
• Regulatory Oversight: Subject to insurance regulations, which can vary significantly by jurisdiction.
• Management Complexity: Requires expertise in insurance management and regulatory compliance.
• Capitalization: Need for adequate capitalization to meet regulatory and risk-bearing requirements.

Option 3: Risk Retention Groups (RRGs) and Risk Purchasing Groups (RPGs)

Risk Retention Groups (RRGs) and Risk Purchasing Groups (RPGs) are both mechanisms that allow businesses to manage and finance risk, particularly in the context of liability insurance. Here’s a high-level discussion of their pros and cons:

Risk Retention Group (RRG)

Pros:

• Customization: RRGs allow member businesses to tailor insurance policies specifically to their needs, leading to potentially better coverage.
• Cost Savings: By pooling resources and avoiding the commercial insurance market, RRGs can reduce insurance costs.
• Control: Members have more control over the insurance process, including underwriting, claims handling, and risk management.
• Stability: RRGs can provide stable insurance availability even in hard markets when commercial insurance becomes expensive or unavailable.
• Flexibility: Can cover a wide range of liability exposures, except workers’ compensation.

Cons:

• Capitalization Requirements: Establishing an RRG requires significant initial capitalization, which can be a barrier for smaller businesses.
• Regulatory Complexity: While RRGs are regulated under federal law, they must also comply with some state regulations, which can be complex and burdensome.
• Limited to Liability Insurance: RRGs can only provide liability insurance, not other types, such as property insurance.
• Risk Concentration: If the group is not well-diversified, losses can be substantial, affecting all members.

Risk Purchasing Group (RPG)

Pros:

• Access to Insurance Markets: RPGs allow members to access insurance markets and products that they might not be able to on their own.
• Purchasing Power: By purchasing insurance as a group, RPG members can often obtain better rates and terms than they could individually.
• Not Capital Intensive: RPGs do not require a significant level of capitalization.
• Regulatory Simplicity: RPGs are generally subject to less regulatory oversight as compared to RRGs and captives.

Cons:

• Limited Control: Members of an RPG have less control over the insurance policies and terms since they are purchasing group policies from insurers.
• Standardization: Insurance policies purchased through RPGs are less likely to be customized to the specific needs of each member.
• Dependent on Insurers: RPGs still rely on commercial insurers to provide the coverage, which can lead to issues if the insurer decides to exit the market or change terms.
• Limited Coverage Scope: RPGs are typically limited to liability insurance and might not be able to meet all the insurance needs of their members.

Option 4: Starting a Traditional Insurance Carrier

What Is Starting a Traditional Insurance Carrier? Starting a traditional insurance carrier involves creating a fully operational insurance company that not only provides coverage for the parent company but also can offer insurance products to external clients. In general, without an experienced actuarial consulting partner, this isn’t a viable option for most individuals coming from outside the insurance world.

Pros:

• Revenue Generation: Opportunity to generate revenue by offering insurance to third parties.
• Market Influence: Ability to influence market practices and set industry standards.
• Brand Extension: Enhances brand presence and adds a new dimension to the business portfolio.

Cons:

• High Barriers to Entry: Significant financial investment, regulatory hurdles, and operational complexities.
• Operational Risk: Exposure to underwriting, market, and operational risks inherent in the insurance industry.
• Regulatory Compliance: Must meet stringent regulatory requirements, including capital adequacy and solvency.
• Management Expertise: Requires specialized personnel who have knowledge and experience in running an insurance business.

Conclusion

When faced with rising insurance premiums, businesses have several strategic options to consider. Self-insuring, forming a captive insurance company, creating an RRG or RPG, and starting an insurance carrier each present unique opportunities and challenges. The right choice depends on the company’s size, financial strength, risk appetite, and long-term business objectives. By carefully weighing the pros and cons of each option, companies can make informed decisions that align with their risk management strategy and overall business goals.

Take Action: If you’re considering alternative risk management strategies, consult with the actuarial consulting and risk strategies experts at Perr&Knight today to explore the best option for your business. With the right approach, you can gain greater control over your insurance costs and enhance your company’s financial stability.

Contact Perr&Knight today to get started.

The term “loss pick” is used very loosely in the insurance industry and is not well defined. The expert actuaries at Perr&Knight are here to clarify the definition and provide more insight into how loss picks are derived. 

Over the years, our actuarial consulting experts have narrowed down the definition of a loss pick to this: the projected ultimate loss ratio for the upcoming policy period, i.e. the future period where an insurance program of interest will begin to place new business on the capacity provider’s admitted / non-admitted insurance company paper.  

This definition could also include defense and cost containment expenses (“DCCE”) and / or adjusting and other expenses (“AOE”), which are the newer names for allocated loss adjustment expenses (“ALAE”) and unallocated loss adjustment expenses (“ULAE”). However, more often than not, a loss pick usually refers only to the loss ratio without any loss adjustment expenses (“LAE”). 

Historical Program Data 

The most common way to derive a loss pick is to utilize the historical premiums, losses, and claims of the underlying insurance exposures to develop a projected loss ratio using standard actuarial techniques. That is, developing the losses to ultimate, trending them to the prospective policy period and dividing them by earned premium at the current rate level (adjusted for any historical rate changes, changes in underwriting, claims handling, prospective exposures, etc.).  

However, too often this data is not available, so alternatives are required to calculate an appropriate loss pick. 

Industry Data 

In some situations, industry data can be used as premiums, losses and underwriting expense information is publicly available in Statutory Page 14 and/or the Insurance Expense Exhibit (“IEE”) for many lines of business for each admitted / non-admitted insurance carrier. This data can be helpful to better understand which carriers are profitable, especially if the company’s line of business of interest falls under one of the specific lines broken out on these statements.  

Granted, this data has some flaws, as any information is generally not program-specific. For example, “Other Liability” – line 17 on these statements – will likely have commercial general liability experience, but it will also be muddied with other types of business that fall under this line, such as contractual liability or professional liability. 

Competitor Programs 

Many times, a new venture will try to emulate the admitted rating plan of a well-known competitor in the industry as a starting point.  

The underlying data for most admitted programs are usually publicly available via the state filings process. These filings may include historical premium and loss experience that is program-specific, which can be used to help identify if the program has been historically profitable for a very niche type of business.  

This information, in combination with the industry data noted above, as well any adjustments for program deviations, can help draw conclusions on the appropriate loss pick for your program. 

Rating Bureaus 

Bureaus such as the Insurance Services Office (“ISO”) or the American Association of Insurance Services (“AAIS”) perform rate reviews annually, resulting in loss costs that are considered adequate for lines of business such as commercial auto, commercial property, commercial general liability, etc. These can be used as a starting point when developing a loss pick.  

The company can load in target underwriting expenses and a profit provision to derive a loss cost multiplier (“LCM”) to bring these loss costs to appropriate premium levels.  

In addition, both rate and form enhancements can be added to assist with your competitive position, helping to achieve a better rate for the risk and maintaining profitability.  

A loss pick in this scenario is derived from the selected target expenses and profit load, as the base bureau loss costs are considered an adequate staring point at the onset. 

The Internet 

When all else fails and no data is available from the other sources mentioned, the internet is full of information that can help derive appropriate frequencies and severities for your niche business. Once obtained and found to be actuarially sound, they can be used to develop a loss cost (similar to the bureaus) and loaded with an LCM to derive a loss pick. 

Underwriting Expenses & Profit Load 

As part of the loss pick discussion, you will also likely have to address target underwriting expenses and profit load. Target underwriting expenses are defined as commission, taxes/licenses/fees, other acquisition expenses and general expenses. A factor of 1.000 minus these underwriting expenses, a selected profit load and LAE, is the initial target loss ratio. This initial target loss ratio will likely need to be supported using standard actuarial techniques.  

The Benefits of Actuarial Consulting Partners  

Deriving a loss pick is not a simple calculation. Applying the myriad of data points available – and knowing the best sources when some data sets aren’t available – is one of the advantages of working with experienced actuaries. The actuarial consulting experts at Perr&Knight have identified various methodologies to help with the derivation of an appropriate loss pick for your program that will be reasonable and supported using the described methods to assist with your new business venture. 

Contact Perr&Knight today to get started. 

With the California homeowners market getting all the national attention due to its coverage availability issues, potential use of catastrophe modeling, and wildfire mitigation filings, it is easy to forget that California has another big change on the horizon impacting personal auto policies: increased minimum statutory limits.  

Senate Bill 1107 increased the minimum amount of coverage required for an auto liability policy from $15,000 per claimant and $30,000 per occurrence for bodily injury and $5,000 for property damage (15/30/5) to $30,000 per claimant and $60,000 per occurrence for bodily injury and $15,000 for property damage (30/60/15) This change represents the first increase since 1967.  

The new limits do not go into effect until January 1, 2025, but companies should be proactive in assessing how the new minimum limits will impact their book and their corresponding competitive position.  

Now is the time for companies to ask: “Is our company fully prepared for the upcoming change in California’s minimum auto liability limits?” 

Start Assessments ASAP 

The California Department of Insurance (“CDI”) required all auto insurance writers to submit filings by July 1, 2023 to ensure that every program had approved factors in place for the new limits. These filings, however, limited what could be proposed. Only companies with no factors in place for the new limits were allowed to add them, and no changes could be made to existing limit factors. 

With the new limits going into effect in a matter of months, each company should be making assessments today about what the new limits will do to its book and its competitive position.  

Waiting until the new year—or even later this year—could put companies at a significant risk of adverse selection if their current factors are severely out of line with the competition. Corrective action needs to take place now to gain approval before the roll-out on January 1. 

Is your company positioned to get the rate it needs for the new minimum limits?  

Projected Increases in Premium for Minimum Limits Policies 

Perr&Knight is constantly assessing the industry and has reviewed dozens of filings to understand where the market will move in 2025. Based on the filings submitted in response to the regulation, our experienced actuarial consultants calculate that the following premium increases will result for policyholders currently purchasing the minimum financial responsibility limits: 

Top 20 California Writers 

Change	Bodily Injury	Property Damage
Mean	23.8%	17.9%
Median	24.0%	13.5%
Minimum	8.3%	2.4%
Maximum	50.0%	44.4%

California Non-Standard Writers 

Change	Bodily Injury	Property Damage
Mean	41.5%	29.0%
Median	43.0%	24.0%
Minimum	12.0%	6.0%
Maximum	63.0%	55.2%

Even policyholders purchasing higher than the current minimum financial responsibility limits, but lower than the financial responsibility limits that will be in effect on January 1, 2025, could see a double-digit increase in premium.  

Based on our review of the filings required by the regulation, policyholders moving from 25/50/10 limits to the new 30/60/15 limits can expect the following increases: 

Top 20 California Writers 

Change	Bodily Injury	Property Damage
Mean	6.0%	5.9%
Median	4.8%	4.5%
Minimum	0.9%	0.4%
Maximum	15.0%	30.0%

California Non-Standard Writers 

Change	Bodily Injury	Property Damage
Mean	11.1%	15.4%
Median	7.7%	9.0%
Minimum	0.7%	1.0%
Maximum	54.0%	42.8%

The Time to Act is Now 

Will your company receive a premium increase in line with the statistics above? If not, a filing to adjust your relativities may be crucial to the health of your book of business. Two of the top 10 writers in California have submitted filings with updates to their increased limits factors in the second quarter of 2024. GEICO is proposing changes to see its premium for policies below the new minimum limits increase by 11% for bodily injury and 34% for property damage. 

The need for action is especially true for companies that exclusively write minimum limits. These companies will see every single customer receive an increase in the coverage on their policy. The question is, will the increase in premium be consistent with the increase in the underlying coverage?  

Protect Against Adverse Selection 

The factors included in the filing required to be submitted by July 1, 2023 may be mispriced due to limitations on what was allowed in that filing. There may have been old, existing factors at those higher limits that are mispriced because they were never used and were not allowed to be changed in the statutory filing.  

This can create the potential for some programs to be severely underpriced at the new minimum limits, leaving it susceptible to adverse selection, especially for non-standard auto customers who are highly price-sensitive and more than willing to leave their current carrier for a lower price.  

Partner with Experienced Actuarial Consultants 

For all these reasons, it is imperative that companies find out where they stand now and determine if they need to make a filing to set proper relativities for each liability limit. Any such filing would need to be submitted soon to allow enough time for review by the CDI and system implementation for a January 1, 2025 effective date for new and renewal business.  

Perr&Knight has filed numerous personal auto filings in California, and our actuarial consultants are uniquely qualified to assist companies in assessing their potential competitive position with the new limits and taking corrective action if necessary. 

Contact Perr&Knight today if you feel you may need some assistance. Our seasoned actuarial consultants can help you navigate these uncharted waters.  

There are many different types of long-term contracts, many of which are backed by contractual liability insurance policies (“CLIP”) and require admitted rate filings, such as auto warranty, guaranteed auto protection (“GAP”), and ancillary products, which include excess lease wear and tear, tire and wheel, theft, key replacement, interior/exterior appearance protection, windshield, paintless dent repair (“PDR”), and pre-paid maintenance.

There are also home warranties covering brown and white goods, such as televisions, audio speakers, mobile electronics, washers / dryers, appliances, and much more. Since these rating manuals are historically simple from a rating structure standpoint, it has been difficult to maintain flexibility and a good competitive position over time.

The actuarial consulting experts at Perr&Knight have identified key steps to help ensure a more flexible and competitive rating plan in the long-term contract space.

Experience Rating

Experience rating is the method in which the actual loss experience of the insured group is compared to the expected loss experience within the insured’s class. In long-term contracts, experience rating plans can be very simple and typically calculate a loss ratio by taking paid losses (over the experience period) divided by earned premium (over that same experience period).

Because long-term contracts earn premiums differently than standard contracts, the paid/earned loss ratio is more closely related to an ultimate loss ratio (assuming premium is earned appropriately). Premium adjustments are typically capped between +/-25% to +/-50%, similar to schedule rating. Schedule rating is not supposed to contemplate actual historical loss experience.

If you do include experience rating within schedule rating, you are limiting the intended use and available max/mins within schedule rating and could exhaust schedule rating max/mins solely by experience rating. Experience rating can help to keep the rates of your insured groups more in line with historical experience. This helps maintain your competitive position and profitability.

Expense Modification

Expense modification plans compare the actual underwriting expenses for an insured group to the standard allowance (or average) expenses of that group. If the actual expenses are lower, an associated credit is given, and vice versa.

Similar to experience rating, you should not include expense modifications within schedule rating as this again will limit the use of schedule rating due to required capping of the allowable debits and credits.

Interpolation and Extrapolation

Premiums can be calculated for various time periods, terms, mileage, initial mileage, coverage plans, deductibles, limits of liability, eligibility criteria, etc., using interpolation or extrapolation.

This is an excellent flexibility to include in rating plans, as it gives you almost unlimited options for all these rating variables, thus preventing the need for refiling when an insured is looking for a combination not specifically offered in your approved rating plan.

Additional Makes / Models

For coverages that have vehicle makes and models as rating variables, such as auto warranty, tire & wheel, etc., newly introduced vehicle makes and models can be classified in the same class as existing models that exhibit similar characteristics. Also, missing vehicle models (within available makes) can be classified in the same class as existing models that exhibit similar characteristics.

This adds additional flexibility and speed-to-market as you will not have to make additional rate filings for newly introduced or missed makes / models.

Class Plan Updates

Class plan may be updated due to emerging experience and the introduction of new vehicles.

For coverages that have vehicle class plans, typically auto warranty and tire & wheel, but there are others, a class plan is very detailed and typically assigns a class factor to every make/model or vehicle for both new and used vehicles.

This wording allows you to update the class assignments (thus the rate charged) based on historical experience and add new vehicles to the class plan without having to refile, resulting in a more accurate rate for the risk, speed to market and enhanced profitability.

Base Rate for Other Products

This rating variable is similar to (a) rating or refer to company rating such that if the product does not fit into any of the criteria within the approved rating plan, the following steps can be taken to develop a new base rate.

The frequency can be multiplied by the severity to obtain the loss cost. The loss cost will then be divided by the permissible / target loss ratio. The result will be the new base rate.

When available, our actuarial consulting experts recommend using a minimum of three years of historical data to develop the loss cost. If historical experience is not available, or not credible, the expected frequency and severity can be used to determine the expected loss cost.

This gives your company the ability to write a risk that falls under the main coverage type, but does not fit the approved rating plan. It provides significant flexibility and a definite competitive advantage.

Market Price Point

Many times, a price point such as $9.99 or $29.99 is more pleasing to an insured and easier to market compared to price points like $10.02 or $30.37. A downward adjustment in price, typically not to exceed 5%, may be applied to the premium.

This adjustment (which is generally downward and not upward) helps the marketing side of the equation assisting in product sales, and also prevents the need to refile when small adjustments are needed to align final rates with marketing desires.

Achieving rating flexibility in your long-term contract rating plan can improve your company’s competitiveness and enhance your bottom line. Our actuarial consulting experts can help.

Contact Perr&Knight today to get started.

On February 9, 2024, the California Department of Insurance (“CDI”) announced proposed regulatory rule changes that will impact the rate application approval process. These changes are part of the CDI’s Sustainable Insurance Strategy. The goal of the proposed changes is to increase “expediency and transparency in the prior rate approval process.”¹ 

Three key changes and their impact are outlined below. 

Extends review time for completeness of rate applications from 14 to 30 days 

Insurers submit rate applications for the following filing types: (1) new program filings; (2) transferred program filings; (3) rate filings; (4) rule filings; and (5) form filings. The filing submissions are reviewed by the CDI’s Intake Unit for completeness.  

For filing submissions that are missing required information, the CDI currently sends objection letters to insurers within 14 days.² With the proposed regulations, this period is being extended to 30 days. If an insurer is unable to respond within the required timeframe, the filing is rejected by the CDI’s Intake Unit.  

Complete filing submissions are processed by the CDI’s Intake Unit and are required to be included on the CDI’s public notice list within 10 days of the determination that the rate application is complete.  

According to our actuarial consulting experts, the extension of the review time will result in the following: 

• Increase in the number of days from filing submission to the public notice date
• Increase in the number of days from filing submission to earliest approval (45-day mandatory waiting period from the public notice date); 
• Reduction in the time to approval from the public notice date
• No expected reduction in the time to approval from filing submission date.  

Although form and rule filings require less time to review for completeness, they will be subject to the same extended review times as rate filings. 

Redefines a complete rate application 

There are several changes which clarify and update the regulations that outline the information required for a complete rate application. The CDI already includes a number of these items as part of the current rate application process. However, the data reconciliation for rate filings is performed after the rate application has been processed by the CDI’s Intake Unit.  

With the new regulations, the data reconciliation will be performed at the beginning of the filing process and prior to public notice. In order for the rate application to be complete, all of the data must be reconciled and differences explained.  

The CDI publishes a Prior Approval Rate Application – Data Quality and Reconciliation Checklist (“checklist”) on their website. Prior to submitting a rate filing, companies should perform all the items on the checklist. The CDI has an internal tool that is used to perform all these checks on the data.  

Based on information provided by the CDI and a review of a number of rate filings by our actuarial consulting experts, a number of companies are not checking the data and have unexplained reconciliation differences. These companies receive objection letters requesting an explanation of these differences, which result in delays in the filing approval process. The CDI will not start reviewing a rate filing until all reconciliation differences are explained. When there are unexplained data reconciliations, more often than not, companies have data errors that require correction. The CDI does not currently have any threshold for immaterial differences, which is normally common when working with data that could be coming from different systems. 

The CDI will eventually provide their internal data reconciliation tool to the industry. Perr&Knight’s actuarial consulting experts have built a tool that performs the items on the CDI’s checklist and recommends all insurers perform these data checks or use an actuarial firm to assist with this.  

Furthermore, our actuarial consulting experts recommend that explainable reconciliation differences be mentioned in the Filing Memorandum. Otherwise, the insurer may receive an objection letter requesting an explanation, which will delay the filing review process. 

Defines Underwriting Guidelines 

The language in the current regulation does not define underwriting guidelines and states, “the Commissioner may later require the submission of relevant underwriting rules.” For a rate application to be complete, underwriting guidelines must be included regardless of whether or not any changes are being proposed to the underwriting guidelines.  

In order to ensure that complete underwriting guidelines are included with the rate application, the proposed regulations state the following: “A complete rate application shall include any and all criteria, guidelines, systems, manuals, models and algorithms the insurer uses to determine whether to accept, examine, inspect, cancel, non-renew, or re-underwrite a risk, or to modify an applicant’s or insured’s coverage or coverage options.”  

Although these items may include trade secret information, the CDI does not currently allow this to be submitted on a confidential basis, according to our state filings consultants. Furthermore, changes to these items require a filing to be submitted for prior approval.   

As a leading provider of actuarial consulting and state filings services to insurers in California, our consultants actively follow the California market and are very familiar with all the filing requirements in the state. We prepare and submit more California filings than any other company. If the proposed changes go into effect into California, we can provide guidance and support to ensure minimal impact to your state filings process. 

Let us help you navigate the challenges of California insurance product regulation. Contact the state filings experts at Perr&Knight.