Actuarial Consulting

Workers’ Compensation Pricing – Are You Doing Enough? 

by Cyndi Cooper

In today’s fast-paced, digital world, there are more options than ever for employers to purchase their Workers’ Compensation (“WC”) insurance. Depending on where a business is located, employers may be able to request quotes and obtain coverage online, through an insurance agent or broker, directly from an insurance carrier or state fund, or by partnering with a Professional Employer Organization (“PEO”). With so many options available for employers to shop for WC coverage, it is more important than ever for insurance programs to have competitive pricing structures and for insurance providers to proactively monitor their WC programs.  

Insurance providers that put their WC programs on autopilot may jeopardize the profitability and competitiveness of their programs over time. For example: 

  • WC programs that auto-adopt loss costs and rates from bureaus for WC insurance without periodic review increase the risk of their rates not aligning with their actual experience.  
  • As shifts in the market happen, WC programs risk losing their competitive edge if they assume the structure of their program is appropriate without keeping an eye on competitors or market trends.  

Based on decades of providing actuarial consulting and filing support to insurance providers throughout the U.S., here are the questions you should be asking to achieve competitive WC pricing.  

“When was the last time we reviewed our rate adequacy?” 

Failing to conduct regular assessments of rate adequacy poses the risk of drifting further away from adequate premium levels and could lead to adverse selection. This situation could ultimately result in a double-digit rate increase to realign to the appropriate rate level. Such a sudden hike in rates may motivate employers to shop for WC coverage elsewhere and have an adverse impact on your business growth objectives. If you haven’t reviewed your WC rates within the past few years, you are overdue for an evaluation. 

“Are we experiencing a decline in business?” 

Companies that diligently monitor their WC programs do not merely follow the bureau’s guidance, they strategically file for appropriate rate decreases to maintain competitive pricing – a savvy approach to attract customers seeking lower cost options. Your company should consider whether rate reductions that exceed those recommended by the bureau are an available option. Filing appropriate rate decreases over time may help attract and maintain policyholders with favorable loss experience seeking to lower their premium costs. 

“What are our competitors doing?” 

Speaking of competitors, their actions can offer valuable insights into potential revenue opportunities your company may be overlooking. Analyzing the industry or specific competitors can help you formulate necessary program enhancements to ensure your continued competitiveness. 

“How can we enhance our pricing segmentation strategy?” 

To determine the effectiveness of your pricing segmentation, you should conduct a thorough analysis of the rating detail. This evaluation may reveal the potential need for updates to tiering, new class deviations, and rating discounts/credits, which can support your portfolio growth goals or enable precise targeting of specific market segments.  

In addition, by evaluating your portfolio by rating detail, you may discover it’s a good idea to discontinue underwriting certain risks. The analysis could also indicate further segmentation is needed. Did you know there are jurisdictions that permit filing rates for sub-classes? By doing a thorough review, you could discover an opportunity to split a single class code – due to diverging results based on distinct segmentations within that class grouping – to improve rate adequacy. 

Even if your WC programs are performing comparably to industry standards, a granular analysis of the rating attributes could hold the key to achieving competitive pricing. 

“Are we planning to grow?”   

If your intentions involve expanding your WC offerings into new jurisdictions, conducting a market analysis of competitor programs can provide valuable competitive intelligence to help you hit the ground running. By analyzing the approved programs of leading insurers, you can identify potential gaps in your proposed programs and ensure adequate pricing even before entering that market. 

“Are we staying on top of industry changes?” 

The greater your awareness of industry changes, the better prepared your company will be to file and execute changes without disrupting the business flow. One example is the California Department of Insurance’s evolving position regarding large risk alternative rating options (“LRARO”). Keeping informed of market changes allows you to develop, file and implement program revisions and offer more options to your policyholders.  

Work with actuarial consulting partners 

Keeping a close eye on all the factors that could impact your WC pricing is a time-consuming and potentially overwhelming endeavor. It’s understandable that so many companies choose to auto-adopt and maintain a consistent rating structure over time. However, it’s impossible to overstate the potential gains of closer program monitoring. 

Perr&Knight is a leading provider of actuarial consulting services for WC insurance and can help monitor your rate adequacy on a regular basis. In addition, our experienced actuaries keep up with current industry trends, regulatory changes, and pricing flexibilities and can serve as a valuable partner to ensure you stay informed and knowledgeable about the WC market.  

The bottom line on Workers’ Compensation pricing is that taking a “business as usual” approach isn’t enough. Sooner or later, lack of proactivity will catch up to you. Adequate monitoring and partnership with experts increase your chances of successfully achieving adequate WC pricing for your program. 

Let us help you determine if your WC pricing is adequate. Contact the experts at Perr&Knight today. 

2023 Florida Tort Reforms – What You Need to Know

by Casey Tozzi

In an effort to address affordability in the personal auto and homeowners markets, Florida has recently enacted significant reforms that have dramatically changed the tort law applicable to personal insurance policies in the state.  

Our actuarial consulting experts break down what this means for insurance companies and in the years ahead.  

ATTORNEY INVOLVEMENT HAS BEEN SIGNIFICANT IN FLORIDA 

For the past 50 years, Florida has been a no- fault state, where drivers rely on personal injury protection (“PIP”) coverage from their own policy to cover the cost of their injuries in exchange for a limitation on their ability to sue. Despite this intended limit, Florida’s PIP claims have been nearly three times as likely to be litigated as in other states1. 

Litigation is also a major cost driver in the property insurance market. In 2020, Florida accounted for only 9% of countrywide homeowners insurance claims but a whopping 79% of all homeowners insurance lawsuits2.  

Exhibits 1 and 2 below show the number of lawsuits filed against the top 20 personal auto and homeowners insurance carriers in the state of Florida, respectively.  

Exhibit 1 

1. Auto Insurance Affordability in Florida, Insurance Research Council

Exhibit 2

2. National Association of Insurance Commissioners

REFORMS DESIGNED TO REDUCE COSTS 

Florida’s recent reforms include: Senate Bill 2A (“SB2A”), passed in December 2022, and House Bill 837 (“HB 837”), signed March 24, 2023. SB2A eliminated one-way attorneys’ fees and prohibited the assignment of benefits for residential or commercial property insurance policies written January 1, 2023 or later. HB 837 extended this by eliminating one-way attorneys’ fees in all but some declaratory judgments. In addition, HB 837 introduced new requirements for plaintiffs to recover damages. Most notably, it makes Florida a modified comparative negligence state, which prohibits claimants that are more than 50% at fault from recovering damages. It also reduces the statute of limitations for negligence claims and provides additional standards for bad-faith actions. 

IMPACT ON RATE FILINGS 

Due to the prospective nature of ratemaking, rate filings now need to consider the new tort environment. Historical data alone will not be sufficient to project future losses. There is a high degree of uncertainty since the reform will influence attorney and plaintiff behavior in response to the new laws.  

These new patterns will take time to emerge, given claims with attorney involvement take longer to be adjudicated. These reforms are expected to reduce both the percentage of claims that are litigated and the average claim severity since non-litigated claims cost less than litigated claims. Lower payments will be made to plaintiffs’ attorneys, and the insurer’s defense and cost containment expense should also be reduced since fewer claims will need to be defended.  

The Florida Office of Insurance Regulation commissioned studies to determine the potential impact of changes for some past reforms, but no study is available yet for these recent reforms. Insurers must evaluate the anticipated impact of the reforms on their losses and loss adjustment expenses and reflect this in their rate filings. Experienced actuarial consulting partners like the team at Perr&Knight can provide support to inform rate filing changes. 

Private passenger auto rate filings open on or after July 1, 2023 have been required to submit detailed data to estimate the effect of HB 837 and to make necessary adjustments in the filing. Similarly, homeowners rate filings submitted after July 1, 2023 have been required to reflect projected savings due to the combined effect of several reforms over the past two years.  

We keenly understand the data requirements and reasonable projections to provide the support that is needed. Let Perr&Knight’s team of expert actuaries use our proven experience to assist with your Florida rate filing needs.  

Contact Perr&Knight today to learn more.   

The Advantages of Face-to-Face Client Meetings in a Post-COVID World

by Scott Knight

The business world underwent a radical transformation in the wake of the COVID-19 pandemic. Remote work, virtual meetings, and digital communication tools became the norm. However, as we emerge from the pandemic, it’s becoming increasingly evident that face-to-face client meetings still hold a vital place in the business landscape.

In this blog, we will explore the enduring importance of in-person client meetings and why they remain essential to building strong business relationships in a post-COVID world.

Building Trust and Rapport

Decades of client engagement have shown us that one of the most significant advantages of face-to-face meetings is building trust and rapport – especially for businesses seeking support from an actuarial consulting firm. 

While virtual meetings have undoubtedly bridged geographical gaps, there’s a certain depth and authenticity that only physical interaction can provide. Meeting someone in person allows for non-verbal communication cues like body language and eye contact, both crucial for establishing trust.

Face-to-face interactions foster a more personal connection, helping all stakeholders feel heard, valued and appreciated.

Effective Communication

Miscommunication is a common challenge in virtual meetings, often due to technical glitches or a lack of personal connection.

When occupying the same space, individuals can easily pick up on subtle cues and nuances in conversation, leading to better understanding and problem-solving. Since all clients in the insurance industry have unique business structures and needs, working relationships between a client and an actuarial consulting firm like Perr&Knight require as much collaboration and streamlined communication as possible.

In-person meetings also minimize interruptions and distractions, enabling participants to focus on the discussion at hand. For us, these working sessions often reveal a more detailed picture of our clients’ true needs, allowing us to arrive at the most effective solution even faster.

Enhancing Creativity and Innovation

Creativity often flourishes in face-to-face settings. Brainstorming sessions, idea generation, and innovative problem-solving are all areas where in-person meetings excel. Being physically present in the same room can spark new ideas in ways that virtual meetings struggle to achieve. The energy and synergy generated during face-to-face meetings can lead to breakthrough ideas and solutions.

Strengthening Personal Connections

Business is not just about transactions – it’s also about relationships. In-person meetings provide an opportunity to get to know clients or partners personally. Sharing a meal, engaging in small talk before or after the meeting, and sharing social activities all foster bonds that go beyond business.

These personal connections can lead to more enduring and loyal relationships, which are essential for the long-term success of any venture.

Reading the Room

Virtual meetings often lack the ability to “read the room.” Participants in online meetings might mute their microphones, turn their cameras off, or otherwise adjust their natural behavior when on camera.

Face-to-face meetings enable you to gauge the participants’ moods, reactions, and engagement levels more accurately. Particularly for sales teams, this in-person insight can prove to be invaluable. What a client doesn’t say can often yield important clues to their business needs or engagement with your company.

Equipped with this insight, your teams can adjust your approach, address concerns, and ensure everyone is on the same page. The subtle but crucial feedback is essential for making necessary adjustments and improving the meeting’s effectiveness.

Competitive Advantages

In a world where most interactions have gone virtual, businesses that prioritize face-to-face meetings gain a competitive advantage. They stand out as more committed, reliable, and willing to go the extra mile to nurture relationships.

In the insurance industry, the rush to replace in-person interaction with automated tools can sometimes introduce inefficiencies that slow product development and time to market.

An effective actuarial consulting firm partner understands the importance of balancing the advantages and limitations of communication technologies. At certain junctures, in-person meetings advance projects and relationships further than any digital tools, enabling insurance businesses to achieve more, even faster.

Logistical Challenges 

Though the points listed above are all solid benefits for face-to-face collaboration, scheduling and coordinating in-person meetings does present some challenges.

Planning face-to-face meetings is tricky when all the necessary participants are rarely in the office simultaneously. Scheduling trips to visit multiple clients within two or three days can introduce logistical roadblocks because everyone has different working hours due to the post-COVID world of remote and hybrid working situations.

Take extra care and provide plenty of advance notice to ensure all appropriate parties are available and prepared for an in-person meeting.

Travel Inconveniences

Years after the initial pandemic-related global shutdown, the transportation industry has finally reached the pre-COVID cadence. But travel has become more expensive, unproductive, and inconvenient.

Staying out of town to visit a long client list over several days can be expensive. Time away from the office reduces professional productivity. Meanwhile, many families have adjusted to a new normal involving scheduling flexibility. Extended stays away from one’s home base can throw a wrench into team members’ professional and personal lives.

Finally, navigating airports with today’s flight delays and cancellations can make travel very inconvenient – a challenge remote working has seemingly solved.

Industry Conferences Check All the Boxes

We have found that in this post-COVID world and remote working environment, attending more industry-related conferences is one of the most efficient and effective ways to see many clients in one place.

Actuarial consulting firms like Perr&Knight have clients spread across the country, so individual client visits aren’t always an efficient use of time or resources. Industry conferences provide a great opportunity to “meet halfway,” enabling insurance companies to get more done in a shorter period and allowing us to meet with more clients and prospects than we could otherwise.

Setting up meetings and dinners before the conference enables clients and consultants to make the most of every minute, providing in-person opportunities to connect professionally and socially.

While virtual meetings undoubtedly have their merits, the importance of face-to-face client meetings remains as crucial as ever. In a post-COVID world, these meetings provide a unique opportunity to build trust, enhance communication, foster creativity, strengthen personal connections, and gain a competitive edge. Incorporating in-person interactions into your business strategy can create more meaningful and lasting relationships, ultimately contributing to your success in today’s evolving business landscape. Face-to-face meetings are not relics of the past – they are the cornerstone of future success.

Connect in person with the experienced actuaries at Perr&Knight. Contact us today or see which upcoming conferences we’re planning to attend.

Nevada Defense Within Limits – Company Action Required

by Adrienne Lewis

By Adrienne Lewis and Scott Whitaker

Nevada enacted Chapter 191 of the laws of 2023 (AB-398), which generally prohibits insurers from issuing or renewing a policy of liability insurance that contains provisions that reduce or limit the availability of liability coverage stated in the policy by the costs of defense, legal costs and fees and other expenses for claims. This change is effective for new and renewal policies issued on or after 10/1/2023 for policies written in the admitted market. Per guidance from the Nevada Division of Insurance, it does not appear that these changes apply to the Excess and Surplus market.

Costs of defense, legal costs and fees, and other expenses for claims are commonly referred to as Defense Within Limits (“DWL”) and are common in most types of liability insurance (e.g., General Liability, Professional Liability types of insurance, including Directors & Officers, Employment Practices, Fiduciary, and Errors & Omissions). 

Our lengthy experience providing actuarial consulting services for insurers in Nevada and throughout the U.S. has shown us that the cost of defending these types of claims can be significant and greatly impact the rates and rating factors used in determining policyholder premium. 

Forms Impact

Nevada requires approval in writing of all policy coverage forms, application forms, endorsements, and declarations pages before they are used. There is no deemer provision for forms filings. Many forms associated with commercial liability programs contain language associated with DWL. This language may include specific provisions, exclusions, per-claim limits, or aggregate limits.

All forms associated with DWL will require review and modification such that they do not limit the amount of liability or otherwise limit the availability of coverage associated with defense costs. In many situations, the forms may need to be withdrawn.

Rates/Rules Impact

Although rates and rules for commercial lines are typically exempt from filing requirements in Nevada, insurers still need to consider the impact of the revised legislation on their rating plans. A review of limited, publicly available Nevada rate/rule filings show that commercial liability programs typically charge 5% to 15% higher for defense costs outside limits as compared to DWL. Industry data similarly shows defense costs represent from 10% to 20% of indemnity and defense costs. The tables below show the ratio of defense costs to indemnity and defense costs for the Other Liability line of business.

Guidance from the Nevada Division of Insurance says the new law does not require unlimited defense costs. A separate limit for defense costs may be selected by the insured, including a limit of $0. To maintain your organization’s targeted profitability level in Nevada, we highly recommend an actuarial review of the rates and rules for products that contain DWL.

Partner with Experts 

Perr&Knight is a leading provider of actuarial and form consulting services and state filing support to insurers in Nevada. Our consultants actively follow the Nevada market and are very familiar with all the filing requirements in the state. Amendments to DWL provisions should be reviewed and modified to adhere to new requirements. Our experienced actuaries are available to facilitate a smooth process for filing updated forms.  

Contact Perr&Knight to learn more about Nevada’s Defense Within Limits changes and how we can help.

10 Questions to Answer Before Launching a New Insurance Product

by Kyle Hales

Throughout our decades of designing, developing, and providing actuarial support for insurance products, we have seen firsthand what it takes to bring new insurance products to market. Unfortunately, a good idea isn’t enough. Even established companies are often surprised at the depth of detail and scope of supporting documentation required when developing a new insurance product.

Here are ten critical questions from the experts at Perr&Knight to consider throughout the insurance product development process, whether you are a traditional insurance company, InsurTech firm, startup, Managing General Agent (“MGA”), Managing General Underwriter (“MGU”), Program Manager, captive owner, insurance agent / agency, or insurance entrepreneur.

1. Who is your target market?

Upfront legwork like this will help you establish whether there is indeed a need for this product in the marketplace. Clearly defining your target buyer will also aid in determining how to market the product and how big of a return you can expect.

2. What is your projected premium volume?

Before diving into the product development process, it’s helpful to assess the size of the market for this product. Depending on the product type, this information might be easy to compile – or it might require deeper research. Experienced actuarial consulting partners like the team at Perr&Knight can help draft reasonable estimates for premium volume.

3. Who are your competitors?

Competitive research is valuable for many reasons. First, it lets you know if the market is already saturated or has room for more players. Second, you can learn from the successes or failures of similar existing products. Finally, if a similar product is already available, you can use this information to determine on what basis you can compete.

4. What type of insurance will your product provide?

Will your product fall under the scope of Property & Casualty (“P&C”), Accident & Health (“A&H”), or another type of coverage? Will you be providing group or individual coverages? Different coverages are subject to different regulations that also vary by jurisdiction. The answer to this question establishes a foundation that will inform nearly all other decision-making during product development. The structure of the product once again comes down to its type and use: commercial vs. personal, will your product be based on policy language already in use by bureaus, or will you need to develop independent policy language? Articulating your product’s structure will help set realistic expectations for timelines and cost estimates.

5. What triggers a claim under your product?

Defining the parameters to trigger a claim can tell you much about your product. Determining what doesn’t initiate a claim is equally important. Your actuarial consulting team will use this information to calculate the frequency and severity of potential claims, helping you to determine how the product will help potential policyholders cede insurance related risk.

6. How will the rates be supported?

How will the rating work? Can you base your rates on existing data, or will your actuarial consulting team need to obtain independent data? Are there similar products in the marketplace offering analogous coverages or will your actuaries need to use other data as proxies for the frequency and severity of losses?

7. Do you plan to retain risk or cede it off?

Many new entrants will not initially retain risk and will only make a commission on the product’s sale. However, over time, as premium volume grows and the market becomes well established, you may decide to retain risk and make a profit on underwriting. Structuring the right deal upfront with the insurance carrier is essential.

8. In which states will you offer this product?

This question is particularly important for overseas companies, who don’t fully appreciate the magnitude of difference between insurance product regulations in 51 independent U.S. jurisdictions. This is where partnering with actuarial consulting and insurance product development experts like those at Perr&Knight is critical. We understand all state-specific regulatory nuances and will help you sidestep avoidable pitfalls.

9. How challenging is the regulatory environment?

Again, each jurisdiction has a different set of regulations and expectations. Waiting until you’re deep in the filing process to discover state-specific requirements can create a last-minute runaround that can slow your time to market or even result in disapproval. Insurance experts like the team at Perr&Knight can explain well ahead of time what to expect so you can prepare all documentation before it’s time to submit to regulators.

10. Do you plan to write in the admitted or alternative market?

Products in the admitted market are often more “every day, run-of-the-mill” exposures. It’s the insurance product development process most people in the insurance industry are already familiar with. The advantages of writing business in the admitted market are that the taxes are often lower. However, the regulatory environment could make the approval process much more challenging.

Meanwhile, never-before-seen products have the advantage of being first to market. Although, there are some considerations when writing business in the alternative (or non-admitted) market. You will have to demonstrate that there is no admitted market for this product, which can require obtaining three declinations for standard types of insurance. The tax reporting requirements are also significantly more challenging. This isn’t to say that writing in the alternative market doesn’t have major advantages – avoiding much of the rates, rules, & forms regulatory process and cornering the market from the get-go can be a huge upside. It’s important to be aware of the challenges of the alternative market before you get too deep into product development.

Developing a new insurance product is an exciting process. However, failure to thoroughly think through the details of your product, target consumer, market, and regulatory environment will present hurdles that can be avoided. Adequate planning, preparation, and partnership with experts increases your chances of success.

Contact Perr&Knight’s accredited actuaries and experienced product development team to discuss your new insurance product.

How to Get a Commercial Lines Filing Approved in the State of Washington

by Michael Covert

The State of Washington has some of the most thorough actuarial / competitive analysis support requirements for rate filings out of all 51 U.S. jurisdictions. To obtain approval on a commercial lines new program or a rate filing revision, specific steps must be followed, or your chances of approval quickly diminish. Based on decades of actuarial consulting to insurance companies writing business in Washington, we have seen what helps improve the chances of speedy approval – and what gets in the way. Following the below steps will help ensure a more timely approval in this highly regulated state. 

New Program Filings:

Bureau Based Filings

Filing to adopt the loss costs and rules of the Insurance Services Office (“ISO”), for example, is a type of bureau-based filing. While these are the easiest to obtain state approval – since the bureau loss costs are already approved – you are still required to support the loss cost multiplier (“LCM”) and any state exceptions. The LCM consists of commissions, taxes/licenses/fees, other acquisition expense, general expense, and profit load. These must be supported based on your historical expenses (or industry expenses if historical data is not available) and should not deviate from the historical averages without support. For long tailed lines, like commercial auto liability and commercial general liability, you must also include an increased limit factor (“ILF”) risk load offset in the LCM (which tends to lower the overall LCM from the indicated). In addition, deviating from the LCM, which is usually done by incorporating a loss cost modification factor (“LCMF”), requires full support either from competitors approved in the state or historical data. 

Independent Rating Plans

If your rating manual is not based on a rating bureau, you will need full support for the base rates and any rating factors in the proposed rating plan. If your rating plan is not an exact copy of an approved Washington competitor’s rating plan, any deviations will need to be supported with a competitive analysis. A comparison of base rates and all rating variables will be required to ensure they are not inadequate, excessive, or unfairly discriminatory. In addition, expense offsets are required as discussed in more detail below.

Filings Based on Competitors

Our lengthy actuarial consulting experience in Washington has shown us that one of the best ways to get an independent rating plan approved is to base your filing on another approved Washington competitor manual. You must supply the Department with the SERFF# as well as the Washington Department approval # on any competitor analysis. Note that any deviation from that competitor plan must be fully supported using other approved competitors or with applicable historical premium/loss data. 

While Washington technically does not permit filings based on other competitors, they are permissible if you derive the loss costs of your competitors and load in your own underwriting expenses and profit load. A filing will not be approved without using this method to derive the base rates, so it is likely that your Washington rating manual will deviate from the manual you are using in other states. It is also very possible that the competitor manual upon which you want to base your rates is not approved in Washington, meaning you may need to select a different, Washington-approved competitor.

Return on Equity Exhibits

These are required in your filing submission to support the underwriting expenses and profit load, but unlike most other states, Washington is only interested in your return on insurance operations, not your total return on equity. The return on insurance operations, in general, cannot be above 5.0%. Many times, profit load, or other figures in the exhibits, require adjustments to pass this requirement. While there are other alternative methodologies the Department permits, making adjustments to a return on equity model is usually the best way to meet this requirement. For Bureau based filings, it is also likely that your LCM will be different in Washington compared to other states.

Filing Memo

Explaining the derivation of your rates in detail is important to obtain approval. You should explain the exact steps taken to develop the rating manual, providing your step-by-step process to derive the rates and rating factors. Further, each insurer must include the name of its statistical agent, per statute requirements. It is possible to not receive any objections from Washington and get a timely approval if all the above guidelines are carefully followed.

Rate Filing Revisions:

Actuarial Support

If you are making a rate revision to a currently approved program, any changes need to be fully supported. If you are taking a base rate increase, in general, an overall rate level indication is required. A rate indication indicates the estimated rate change necessary on an aggregate basis. If you are making any changes to your rating variables, a class plan analysis is required. A class plan analysis will review some or all the rating variables in your rating manual, based on data availability, excluding the base rate. If you are looking to make a rate revision based on competitor rates rather than actuarial data, a detailed competitor analysis is required, showing how the base rate or rating factor deviations are justified. 

Actuarial Memo

While a filing memorandum is necessary for a new program filing, an actuarial memo is required for a rate filing revision when historical data is used to support your filing. Your rate level impact should be in line with the rate level indication (i.e. an increase / decrease should not be above / below the indication). If you are making changes to rating variables, it is important that your class plan analysis supports each change accordingly. Always give as much detail as possible supporting why you selected a particular change to a rate or rating factor to prevent unnecessary questions.

Do you need guidance on how to get your Washington new program or filing revision approved to improve speed to market? Contact the actuarial consulting experts at Perr&Knight today. 

Navigating Michigan’s PIP Auto Insurance Changes 

by Mitchell Paden

Michigan’s recent overhaul of Personal Injury Protection (PIP) policies has created a labyrinth for insurance companies writing personal auto business in the state. A quick re-cap: until July 2, 2020, insurance companies were required to offer unlimited benefits for no-fault claims within the state. In 2020, Michigan passed sweeping legislative reform which made numerous changes including a ban on certain factors from being used to set rates, such as occupation, credit score, and homeownership. The most significant change, however, was enabling insurers to offer lower limits to provide premium relief for drivers who accept lower coverage limits.

These changes have thrown a wrench into rules and filing requirements for auto insurers in the state. Here are a few key points to be aware of if your company is currently writing business in Michigan or if you plan to expand into the state, as outlined by our actuarial consulting experts.

File-and-Use Is Now Prior-Approval

Auto insurers in Michigan, previously accustomed to using new rates immediately after filing changes with regulators via its “file and use” rules, are now required to submit rates to the Department of Insurance and Financial Services (DIFS) and obtain approval before they go into effect.

Many insurers – especially smaller companies – struggle to provide regulators with the appropriate actuarial support documentation for their rate and forms filings in this new prior-approval environment. The previous approach of “If this doesn’t work, we can just submit another filing” no longer applies.

Once accustomed to filing and putting new rates into effect immediately, companies must now maintain a longer runway for any proposed changes. In addition to the extra time it takes to gather the requisite materials and documentation for the new requirements, companies should build at least 90 days into their planning process for DIFS’ review of the filing before approval. For companies that aren’t proactive, this change can result in significant delays for new rates to become effective, which can disrupt company earnings and cash flow.

PIP Limit Percentage Requirements

The regulation requires that companies maintain compliance with required premium discounts for the new, lower PIP limits. Every filing now requires a detailed accompanying worksheet that outlines average premiums at each offered limit to help ensure that the new limits still provide the required premium reductions to customers. This worksheet must be filled out with new data for each rate filing, and many companies lack the in-house actuarial support staff to compile the information promptly. The PIP limit worksheet is the largest of numerous new requirements on all rate filings in the state. Actuarial consulting from outside experts like the accredited actuaries at Perr&Knight can alleviate the pressure on in-house teams as they become more accustomed to new filing policies.

A Changing Environment

Changes to PIP coverage and rating rules for Michigan drivers are a reminder that insurance is never stagnant. Climate change, global pandemics, shifts in driving behavior, and more all contribute to a constantly evolving landscape.

Though changes may seem slow, insurance companies that lack inherent flexibility in their business processes will struggle to comply with new legislation and regulatory environments – and risk being outpaced by more nimble competitors.

Eventually, these new factors will become standard for Michigan insurers, but until then, there are bound to be a few bumps in the road ahead. Working with the experts at Perr&Knight can help smooth the path. Our actuaries and filing teams have longstanding experience supporting clients in Michigan. We understand the depth and details of these new PIP regulations and can help insurers stay on track for approvals.

Contact Perr&Knight today to learn more about our actuarial consulting services.

How to Navigate the California Rate Filing Environment

by Brett Horoff

Many insurers are struggling to obtain additional rate in California to address unprofitable programs and elevated loss trends. State Farm’s recent announcement in May 2023 that they will stop accepting new business for homeowners shines a spotlight on the issues with the California marketplace. While State Farm made a public announcement, Allstate quietly notified the state of their decision to stop writing new homeowners business (including condo) and commercial policies within the last year. AIG also decided in early 2022 to exit from the admitted homeowners market in California.

How long does it take for filings to be approved?

In Chart 1 below, we have displayed the time to approval for all filing types for the period January 2012 through May 2023. Figures worth noting:

  1. Rate/New Program Filings: Increased from 80-90 days in 2012 to around 350 days in 2023
  2. Other Filings (e.g., rule and form filings): Increased from about 65 days to approximately 150 days
Source: Compiled from filings available from S&P Market Intelligence

We further break down rate filings by line of business in Chart 2 below. Although there are some variations by line of business and fluctuations by year, all the lines of business are on a similar trend path: filings taking longer to be approved.

Source: Compiled from filings available from S&P Market Intelligence 

Based on information provided by our actuarial consulting and state filings experts, there are several factors that have contributed to the increase in the time to approval.

Homeowners rate filings
 Starting in 2018, there has been a noticeable increase in the time to approval for homeowners. In response to a series of devastating wildfires, insurance carriers filed for more restrictive underwriting criteria and significant rate increases in wildfire areas. The CDI heavily scrutinized these filings to ensure the availability of insurance and to make sure that rates were not excessive for these risks. The CDI also added a layer of review that required signoff by upper management, including the commissioner, further increasing the time to approval.

Personal auto rate filings
 The CDI implemented a moratorium on personal auto rate increases during COVID-19. When the moratorium was lifted, the CDI started reviewing rate filings that had been on hold and pending – in some cases for more than a couple of years. At the same time, other insurers started submitting much-needed rate increase filings. Additionally, the CDI was concerned that insurers did not refund enough premium during COVID-19 and formed a committee to review the refunds. The committee coordinated the refund reviews with the rate filings being submitted by insurers, and this extended the review time for personal auto rate filings.

Changes to the filing review process
 Over the years, the CDI has changed its review process. For example, nowadays, you need to submit a complete rate manual with each rate and/or rule filing, and the CDI typically reviews the entire rate manual – not just the items being revised. Largely due to the CDI changing its position over time, it is not unusual to receive objections on items that are not being altered in the filing and were previously approved.

Staffing shortages
 Another factor impacting the time to approval is staffing shortages at the CDI. The CDI has had a number of experienced Bureau Chiefs and analyst retire over the last few years. With the CDI working remotely, it has also made training of new staff more difficult.

All of the above has led to an increase in the number of pending rate filings over the last several years. Fast forward to today, and the number of pending filings is almost 70% higher than the average of the five years pre-COVID. At the same time, the number of submitted rate filings per year from January 2021 to May 2023 is down between 20% to 30%.

Summary of pending and approved rate filings for homeowners and personal auto

There is a significant need for rate increases in California, as can be seen by the pending rate filings for homeowners and personal auto, which are displayed below for the top 10 carriers.

Below are some key figures on approved filings for homeowners and personal auto as of May 2023:
• 16 homeowners and 40 personal auto rate increases filings have been approved in 2023
• Two homeowners and six personal auto rate filings submitted in 2023 were approved
• Approved rate increases range from 3.5% to 65.0% for homeowners and 4.5% to 65.0% for personal auto

As can be seen from the above, there are rate filings that are being approved a lot faster than the overall average to time approval. Also, there is a wide range in the proposed rate changes that are being approved.

How can an insurer reduce the time to approval for filings?

According to our actuarial consultants and state filings experts, the key to reducing the time to approval for filings is to minimize the rounds of objections. To do this, an insurer should do the following:

  1. Expert rate filings reviews: Whether it is an internal review, or one done by an outside actuarial consulting firm, having an expert on California filings review your filings will reduce the number of objections.
  2. Perform data quality and reconciliation: The CDI has a data quality and reconciliation checklist, and companies should confirm that all items on the list reconcile. The checklist is not a required part of the filing, but it includes all the data checks performed by the CDI.
  3. Review updates to filing instructions: The CDI updates its filing instructions on a periodic basis, so insurers should monitor this for any new requirements or changes. For example, the CDI added a rating example requirement earlier this year, which the CDI will request in an objection letter if not provided.
  4. Have virtual meetings with the CDI: Virtual meetings are a good way to keep a filing moving and reduce correspondence back and forth. If you are unsure whether a response will satisfy the CDI, schedule a virtual meeting with the CDI, go through the response and get the CDI’s feedback. Pre-filing meetings or emails can also be used to answer questions on how items should be filed.
  5. File rate changes higher than 6.9%, if well supported: For many years, insurers filed successive 6.9% rate increases rather than requesting their full rate need in a single filing. Although consumer groups can force a rate hearing on personal lines with a rate increase above 6.9% (14.9% on commercial lines), the insurer can negotiate with the consumer group and the CDI on well-supported filings.

About Perr&Knight

Perr&Knight is a leading provider of actuarial consulting and state filing services to insurers in California. Our experts actively follow the California market and are deeply familiar with all the filing requirements in the state. We prepare and submit more California filings than any other company. Our experience includes expert testimony on rating filings and providing guidance to industry associations.

Please contact our team of actuarial consultants and state filing experts to assist with your California insurance products.

Best Practices when Performing Profitability & Competitive Analyses on Program Business

by Michael Covert

In our prior blog on Program Business, called “Guidelines for Filing Program Business,” we discussed how insurance carriers have become more and more interested in writing “program” business over the years. In this new blog, we provide guidance on how program administrators can maintain profitability and competitiveness of their programs. As a recap, we will reiterate the definition of program business.

WHAT IS PROGRAM BUSINESS?

According to the Target Markets Program Administrators Association, Program Business is defined as insurance products targeted to a niche market or class, generally representing a book of similar risks placed with one carrier. The administration of the program is done through Program Specialists, often referred to as Program Administrators or managing general agents (“MGAs”), who have developed expertise in that market or class.

Although administrative responsibilities are negotiated between the Program Specialist and Carrier, the responsibilities of the Program Specialist include underwriting selection, binding, issuing, billing, and often marketing, premium collections, data gathering, and claims management / loss control.

PROFITABILITY ANALYSES

Maintaining profitability can be difficult without a thorough understanding of the actuarial figures insurance carriers and reinsurers generally look at when reviewing Program Business. We discuss below a few types of standard actuarial analyses that are very beneficial to supporting a discussion around profitability.

Overall Rate Level Indications

A rate indication estimates the rate change necessary on an aggregate basis to balance the fundamental insurance equation, i.e., Premium = Losses + Loss Adjustment Expenses + Underwriting Expenses + Underwriting Profit, in the prospective / future period.

For admitted and non-admitted programs, this indication will provide actuarial support for any desired base rate changes, whether positive or negative, and indicates the change needed to meet the program administrator’s desired profit provision.

For example, if your projected loss ratio is 55.0%, this would be compared to the target (or permissible) loss ratio of say 65.0%. The division of these two results in a factor of 0.846 (rounded to three decimal places). By taking 0.846 minus 1.000 you get an overall indication of -15.4%. This implies rates could be decreased by 15.4% while still achieving the desired profit provision.

Historical and Projected Loss Ratio Analysis

While very similar to the Overall Rate Level Indications, these have more of a focus on the historical ultimate loss and defense and cost containment expense (“DCCE”) ratio and the projection of that ultimate loss and DCCE to the prospective / future policy period as compared to determining the amount rates many need to increase or decrease.

The historical ultimates are used to produce loss ratios from more of a financial standpoint and how the program has performed up to the evaluation date of the analysis (for example, an analysis with data as of December 31, 20XX.) The projected ultimate loss and DCCE ratio (i.e. also called “the loss pick” by many program administrators) gives the program administrator an expectation of how the program might perform, from a loss ratio standpoint, over the next policy year all else being equal.

Rating Factor / Class Plan Analyses

A rating factor or class plan analysis will review all rating variables in a rating manual. Rating factors, for example, might include territory (or zip code), limit of insurance, deductible, class code, age of building, credit score, etc.

There are two main types of class plan analyses: one-way analyses and multi-variate analyses. One-way analyses review each rating variable on a standalone basis while not considering any correlation with other rating variables. Multi-variate analyses, which typically involve modeling, such as generalized linear modeling, or other techniques, help to remove correlation between rating variables. Multi-variate analyses typically require much more data, time, and effort.

Program managers will want to determine which analysis makes the most sense for their specific book of business. These types of analysis are very helpful in determining which rating factors are profitable and unprofitable and what changes should be implemented to maintain or improve profitability.

COMPETITIVE ANALYSES

In conjunction with profitability analysis, reviewing the rates, rating plans, forms and endorsements of your competitors are key to help maintaining profitability. It is important that a rating plan achieves an appropriate rate for the risk.

If your competitors have more advanced rating plans or different rating variables that achieve a better rate for the risk, you will likely be adversely selected against and lose your profitable business to a plan with lower rates for these good risks. Conversely, the unprofitable business will stay with you since you are unable to charge them the higher rates needed to achieve profitability.

Finally, there are many differences in policy forms and endorsements that could cause you to pay claims your competitors would otherwise exclude and enhancement endorsements making your competitor’s program more attractive.

The majority of competitor information used in these comparisons comes from publicly available filings or company / industry financial information. We discuss three types of competitor analyses below.

Competitive Analyses – Rates: Along with the above-noted actuarial analyses, it is beneficial to analyze your competitive position at the same time to help ensure any changes made based on your data do not adversely impact your competitive position.

Premium comparisons compare your policy premium, for a specific number of rating examples, to that of your main competitors. Rating factor / class plan comparisons are similar to premium comparisons, except they compare all the underlying factors by rating variable in your rating manual to your competitor’s rating factors. While performing this review, you can also determine if your competitors are offering different or more competitive coverages and/or different rating variables not currently a part of your rating plan, that achieve a better rate for the risk, and might be worth implementing.

Competitive Analyses – Forms:  In conjunction with the premium and rating variables analysis above, it is important to review your policy form and endorsements to help ensure you are offering (and excluding) similar coverages.

If not, you may want to make changes – or at least acknowledge the differences are intentional – and ensure that the rates appropriately reflect the differences. When reviewing endorsements, the entire forms library is usually compiled to see if any key exclusionary or broadening endorsements are missing that might assist in profitability as well as competitiveness.

In addition, if it has been quite some time since a state-by-state compliance review has been performed, our product design team could uncover non-compliant forms or endorsements.  Making appropriate adjustments ahead of time will prevent painful market conduct exams in the future.

Market Research – It is also good to monitor new programs or filing revisions your competitors are implementing. If you are aware of when your competitors are increasing rates, adding new rating variables, changing coverages, adding new forms etc., you can make changes accordingly to maintain your competitive position.

Do you need guidance from a profitability or competitive standpoint on your program or a specific book of business? The actuarial consulting, product design and state filings experts at Perr&Knight are here to help. Contact us today.

Five Benefits of an Expert Review of Your Rate/Form Filings

by Brett Horoff

Have you had a filing disapproved in Florida or New York?

Are you receiving multiple objection letters on your California filing identifying items that do not comply with state requirements?

Do you struggle with providing the required actuarial support in Washington?

You are not alone.

It is incredibly difficult for companies to keep up with each state’s requirements. Most companies do not submit enough filings or have the consistent communication with the Departments of Insurance (“DOI”s) to gain the expertise needed to handle certain states without consulting an expert.

If you work for a large insurance company, you may have a pre-filing meeting with the DOI to discuss your filing. This allows you to obtain some feedback on potential concerns that the DOI may have on the proposed rates and forms, but this is not a comprehensive review, and you may often run into DOI objections during the filing review process that could have been avoided with additional insight on the state’s requirements. Adding an expert review of filings prepared by your company is a “must have” to achieve timely approvals in key states.

Below we provide greater details on the benefits achieved through an expert review of your filings by an actuarial and insurance consulting firm with extensive state filings experience.

Benefit #1: Increase the likelihood of proposed rates and forms being approved

It is not unusual for companies to receive filing objections from state DOIs that request changes to the company’s proposed rates and forms. If a company does not have a full understanding of the options that will satisfy the DOI’s concerns, it may make undesired revisions to the product in response to an objection.

Our actuarial consultants worked recently on a management liability filing in California that used range for rates and rating factor. The DOI had concerns about the subjectivity of the ranges, which may lead a company to eliminate the ranges and use specific rates/factors. Our actuarial consultants were able to assist the company in providing a solution that kept the ranges and was acceptable to the California DOI.

Whether it is to ensure a company obtains its proposed rate change or to recommend changes to the company’s rating plan to achieve the company’s goals, a review by an actuarial consultant and an insurance product development expert can have a positive impact on a company’s bottom line.

Benefit #2: Ensure filing complies with DOI requirements

While each state has laws, often there are DOI positions and interpretations, which are not published, and companies learn about them after the filing and during the DOI’s review. Not knowing this type of information could negatively impact a company’s filing. For example, New York disapproves filings without the opportunity for the company to respond when filings are substantially out of compliance with state requirements. During 2021, the New York Department of Financial Services disapproved 19% of submitted filings and another 8% of filings were withdrawn. New York is not the only state that takes this approach.

The Florida Office of Insurance Regulation is often known for disapproving commercial lines form filings that are not compliant with the state requirements. For auto policies (both personal and commercial), New York has unique coverage requirements that must be reflected on the declarations page. Even if a company uses a bureau template, a state-specific version is generally needed to avoid a series of objections pertaining to the format and contents of the declarations page.

Having an expert review from an actuarial and insurance consulting firm with regulatory compliance services can help companies avoid the dreaded disapproval letter.

Benefit #3: Identify potential DOI objections

While obtaining filing approvals without any DOI objections is unlikely in some states, the ability to identify potential objections will allow companies to address concerns prior to submitting the filing. Not only does this reduce the number of objections received during the state filing review process, but it also provides companies the opportunity to address items that may lack the appropriate support or may raise additional questions from the DOI.

By having an expert review, the company can identify potential objections and either address them upfront or be prepared for them. Many companies are surprised when they receive objections on California filings questioning items that were previously approved in a prior filing and are not being revised in the current filing. For rate and rule filings, the California DOI requires a complete manual with each filing and will review the entire manual – not just the proposed changes.

Benefit #4: Improve relationship with the DOIs

Although DOIs will review each filing independently, the DOIs will remember companies that consistently submit filings not in compliance or lack appropriate support. For frequent violators, the DOIs may outright disapprove the filing without sending an objection letter. The DOIs share information within its various operational areas as well as with other DOIs. This information can often lead to a market conduct inquiry, especially if the concern is related to noncompliance or may have an impact on the consumer. When a company submits a complete and compliant filing, the return on investment may lead to a quicker review by the DOI.

With many of the DOIs experiencing staffing shortages, any assistance companies provide to reduce the time that the DOIs spend on reviewing filings will be appreciated by the state.

Benefit #5: Reduce the time to approval

When companies are submitting rate filings, the premium impact of the changes could be in the millions, so reducing the time to approval could have a significant impact on the company’s bottom line. In 2022, the average time to approval for California on a rate filing is 337 days (median: 264 days) and a new program filing is 207 days (median: 209 days).

When companies have their filings reviewed by actuarial consultants and state filings experts, it allows submission of a more compliant filing with the proper supporting information and may result in the filing being approved quicker.  Another benefit of engaging these experts is that they could help companies navigate filings through the DOI in the most efficient manner possible.

Need an expert review of your filings?

Perr&Knight is a leading provider of actuarial, product design and state filing services to insurers. Our actuarial consultants, product design consultants and state filings experts are very familiar with all the filing requirements in each state – especially the states where insurers struggle the most.

Please contact us if you need an expert filing review.