The insurance industry’s first standardized plan for rating homeowners insurance by individual perils is scheduled to be filed countrywide this summer.
The American Association of Insurance Services (AAIS) recently announced that in July 2010 it expects to conclude testing and begin countrywide filing of a new by-peril rating plan available under its homeowners program.
AAIS is a national advisory organization that develops standardized policy forms and rating information used by more than 600 property/casualty companies throughout the U.S.
By-peril rating allows insurers to rate policies more accurately, based on the particular loss exposures of each risk, according to the organization. The AAIS by-peril rating plan will allow users to rate homeowners policies on the basis of 10 causes of loss, half of them derived from catastrophe exposure and half reflecting “non-cat” exposures.
According to Deborah Summerlin, AAIS vice president of insurance lines, a plan that accommodates 10 causes of loss ensures that significant loss factors in different states are adequately reflected in the rating of a policy.
AAIS’s new plan will be offered as an option to companies using the AAIS Homeowners Program, which will also include a traditional consolidated rating plan.
The plan utilizes a single rating algorithm for all perils, making it relatively simple to incorporate into company operations, and companies can simplify the plan further by reducing the number of perils, Summerlin said.
AAIS’s by-peril rating plan follows several months of analysis of potential rating variables to identify those found to be predictive of loss. In that process, AAIS actuaries utilized the “Pretium” statistical software platform developed by Towers Watson, the international actuarial consulting firm.
“Our actuarial staff would run and re-run our models multiple times to determine relativities,” Summerlin said. “As a result of that analysis, three of 35 weather variables, and two of five crime variables, were determined to have significant impact on loss.”
“In all,” she said, “the use of by-peril rating will allow an insurer to develop a premium to reflect the unique exposure posed by a risk.”
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