Adequate rate maintenance is the cornerstone of an insurance carrier’s profitability, solvency and overall business health. Since there is a clear and traceable relationship between policy premiums and claims payments, the end result goes straight to a carrier’s bottom line. Maintaining appropriate rates is about more than just being able to pay out on claims. It’s about structuring an insurance business to meet future growth goals. Without careful monitoring, indications of inadequate rates might not show up immediately but can have disastrous consequences in the future.
Executive SummaryAdequate rate maintenance is the cornerstone of an insurance carrier’s profitability, solvency and overall business health. Here, Perr&Knight’s Dee Dee Mays provides eight tips to help carriers take a proactive approach to evaluating their rate adequacy.
When carriers maintain adequate rates, they are able to file regularly for smaller changes over shorter periods of time. When they fail to act for a sustained period and are subsequently forced to implement major premium hikes, carriers risk alienating policyholders and attracting additional scrutiny from state insurance departments.
Staying on top of changes that affect premiums also allows carriers to address issues when they arise, not when they become problems. Carriers that are proactive about their rates always fare better than those that are forced into emergency reaction mode.
Here are eight suggestions to help carriers maintain adequate rates for their policies:
1. Carriers should establish mechanisms to maintain and track accurate, timely data.
Insurance carriers are unable to track rate effectiveness unless they track premiums as they come in and obtain an accurate sense of losses as they are happening. Carriers must have reliable, accurate data to provide a big-picture sense of what is happening, at least every quarter but ideally in real time. Systems that feed into ratemaking should also populate the company’s financial reports. Regular auditing of financial reports allows carriers to trust the reliability of this data and compare apples to apples over time.
2. Track additional data points beyond those that are required for financial statements.
Nonfinancial reporting items such as the exposure base and the underlying policy characteristics are important measurements of the carrier’s business and can help insurance companies evaluate trends. These supplemental data points might not be currently addressed in a carrier’s data capture but can provide valuable insight into rate adequacy. For example, frequency and severity metrics enable carriers to measure their data against industry benchmarks, such as data collected by ISO’s Fast Track Monitoring System. Monitoring new business writings by policy characteristics allows a business to track any shifts in exposure.
3. Develop a rate analysis process instead of addressing issues on an ad hoc basis.
When insurance companies become complacent, they also become reactive. They simply do not take the time to address issues until they reach the level of red alert. At that point, many carriers implement knee-jerk reactions and are ultimately too late to get the company back on track. By planning ahead and developing a clear and comprehensive system that accounts for the needs of all stakeholders, carriers can secure the necessary lead time that enables them to smoothly implement rate adjustments and respond fluidly to their business needs.
4. Set up early warning systems.
Data systems can be programmed to alert carriers to dips in premiums, spikes in claims or any deviation from the norm that might indicate a bigger issue. Insurance companies should rely on their technology to flag anomalies so they can address problems immediately and course-correct right away. As rate changes are implemented, renewal premiums can be tracked and compared to expiring premiums to ensure that the desired changes are being achieved and, in the case of commercial lines, discretionary pricing is not adversely impacting the expected changes.
5. Schedule an audit by an experienced insurance consultant.
Getting mired in legacy systems and processes might cause carriers to overlook critical information that could affect their ratemaking policy. Fresh eyes can reveal gaps in data that can provide valuable information to enhance decision-making and reveal potentials for rate increases.
6. Carriers should monitor the business they are writing.
Sometimes the business carriers think they are writing turns up interesting surprises. What a carrier expects to write and what it is actually writing may be two separate things. For example, if you think you are writing preferred private passenger auto risks and find out through monitoring that all of your policies have three DUIs, there may be an issue with the rating factors. Monitoring can reveal issues with rates that might be low in a specific area or for a specific class of business, although overall rates appear adequate. Proper research and close evaluation enable insurance companies to accurately monitor what is being written versus what is expected. This reduces the risk of reacting to surprise realities down the line.
7. Compare differences between the policies agents are quoting vs. what was bound.
Close examination of the underlying risk characteristics between quoted and bound policies can help carriers discover areas where their rates are higher or lower than those of competitors. Comparison of these figures can reveal coverage gaps, rate discrepancies and differences in behavior based on location or demographics that require changes to make rates more accurate.
8. Monitor competitor rate change information and stay current with industry changes.
Keeping a close watch on competitor filings and tracking those changes over time can alert insurance carriers to rate-change opportunities and reveal industry trends on which they can capitalize. For private passenger auto and homeowners, carriers can regularly review ISO Fast Track data, comparing it with their own data to evaluate where they stand in relation to the industry as a whole. This information provides a crucial understanding of the current insurance market and can assist insurance companies in making smarter decisions with regard to rate filings and further development of insurance products.
Insurance carriers run the gamut when it comes to tracking the adequacy of their rates: from little or no monitoring to entire departments tasked with ensuring rate adequacy. The primary takeaway is that carriers must take a proactive approach to evaluating their rate adequacy. Without this vital piece of understanding, the resulting decision-making is based on a shaky set of assumptions that could lead to unforeseen disaster.