Product and Rate Development Board Workshop December 8, 2002 1 - - PowerPoint PPT Presentation

Board Workshop December 8, 2002

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Products & Rates Products & Rates

Product and Rate Development

Board Workshop December 8, 2002

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Policy Language Policy Language

Citizens uses Insurance Service Office (ISO) policy forms and modified ISO policy forms to adjust for the unique coverage that is needed for a residual market such as a wind only policy. The completed forms are filed with the Office of Insurance Regulation for final approval. Insurance Service Office (ISO) = ISO is the property and casualty insurance

industry's leading supplier of statistical, actuarial, underwriting, and claims data. ISO is also the acknowledged leader in writing policy language to cover property and liability risks.

Florida’s Office of Insurance Regulation has accepted the ISO policy language for all policy forms. ISO’s standardized policies help regulators confirm that the policy meets basic coverage expectations and the standardized language helps confirm the ease of policy reading and understanding by policyholders.

Board Workshop December 8, 2002

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Policy Policy

Property Insurance Policy

The insurance policy is a contract of adhesion and as such it is important to write the contract in a way to eliminate any ambiguity to avoid payment of claims that were not intended to be covered based on the rates charged. The following are the sections of a property and liability policy:

• 1. Declarations – Summary of information declared by the insured and the coverage provided

by the insurer.

• 2. Definitions – Defines words in the contract.
• 3. Insuring Agreements – Defines how the insurer will make payment or provide a service,

such as, “We will pay for loss to Covered Property from any of the Covered Causes of Loss.”

• 4. Exclusions – States what the policy insurer does not intend to cover.
• 5. Conditions – Outlines the conditions that must be met by the policyholder for the insurer to

provide coverage, such as timely notification of a loss.

• 6. Miscellaneous Provisions – Utilized when an item does not fall into one of the above

categories, such as to explain voting rights of the insured in a mutual insurance company.

Board Workshop December 8, 2002

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Policy Coverages Policy Coverages

INDUSTRY - COVERAGE Section I - First Party Coverage Section II- Third Party Coverage

Building Liability Contents Medical Payments Detached Structures Loss of Use

CITIZENS - COVERAGE

Personal Lines Account: Section I and II coverages, with the exception of Dwelling Fire Policies (Section I coverage only) and policies where the insured is a corporation only (Section I coverage

• nly)

High-Risk Account: Section I coverage only Commercial Lines Account: Section I coverage only

Board Workshop December 8, 2002

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Causes of Loss Forms Causes of Loss Forms

Basic Form – Causes of loss consist of the following perils specifically named in the policy: fire, lightening, windstorm, hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, theft and volcanic eruption. Broad Form – Causes of loss consist of the Basic causes of loss plus six others. Special Form – Causes of loss include any “risk of loss” that is not specifically excluded. Peril = a specific cause of loss, such as fire, windstorm, or theft.

Board Workshop December 8, 2002

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Perils Insured Against Perils Insured Against

Personal Lines Account: Broad and Special forms. High-Risk Account: Modified Broad and Special forms. Covers only the named perils on the policy. The named perils are: Hurricane, Hail, and other Windstorm. Commercial Lines Account: The named perils are: Fire, Lightning, Explosion, Windstorm, Hail, Smoke, Aircraft, Vehicles , Riot, Civil Commotion, Sinkhole Collapse, and Volcanic Action.

Board Workshop December 8, 2002

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Policy Forms Policy Forms

INDUSTRY FORMS - RESIDENTIAL PROPERTY Homeowners 1 - Basic Form Homeowners 2 - Broad Form Homeowners 3 - Special Form Homeowners 4 – Contents Broad Form Homeowners 6 – Unit-Owners Form Homeowners 8 – Modified Coverage Form INDUSTRY FORMS - COMMERCIAL PROPERTY CP – Building and Personal Property CP – Buildings Under Construction CP - Condominium Associations CP - Commercial Condominium Unit Owner

Board Workshop December 8, 2002

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Policy Forms Policy Forms

CITIZENS - RESIDENTIAL FORMS Homeowners 3 - Special Form Homeowners 4 – Contents Broad Form Homeowners 6 – Unit-Owners Form CITIZENS - COMMERCIAL FORMS CP – Building and Personal Property CP – Buildings Under Construction CP - Condominium Associations CP - Commercial Condominium Unit Owner

Board Workshop December 8, 2002

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Products Products

Citizens offers three basic types of property & casualty insurance products:

– Residential (PLA and HRA) Homeowner Condominium Unit Owner Tenant Contents Mobile Homeowners Dwelling Fire – Commercial Residential (CLA and HRA) Condominium Association Apartment Complex Homeowners Association – Commercial Non-Residential (HRA) Office Restaurant Mercantile Building Motel Church Other

Board Workshop December 8, 2002

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Territory Territory

Personal & Commercial Accounts: Policies are written for eligible consumers, regardless of the location in Florida. High-Risk Account: Policies are written for eligible consumers, only in the eligible areas (see map). These areas represent 29 of the 35 coastal counties in Florida.

Board Workshop December 8, 2002

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Rate Development Rate Development

Industry - Rate Development

Actuaries develop premiums to pay losses according to expected frequency and severity to ensure the insurance company will not become insolvent. The premiums are not to allow for excessive insurer profit and must not be unfairly discriminatory. Class Rating: Theoretically, each insured needs to be charged a premium specific to that risk; however, this is impractical and therefore the classification method of grouping like exposures is utilized (law of large numbers).

Board Workshop December 8, 2002

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Rate Development Rate Development

Industry - Rate Development

Simple view of rating steps:

• 1. Determine pure cost of protection
• 2. Determine expense loads such as agent commissions, premium taxes,

administrative expense contingency reserves, acquisitions costs and profit margin

• 3. Combine 1 & 2 above for a gross premium that is charged to the

policyholder

Board Workshop December 8, 2002

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Rate Development Rate Development

Citizens – Rate Development PLA – Top 20 approach HRA Residential – Modified top 20 approach CLA – ISO loss cost combined with modified top 20 approach HRA Commercial - ISO loss cost combined with modified top 20 approach

Board Workshop December 8, 2002

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Rate Development Rate Development

PLA - Multi Peril Residential Rate Methodology In 1995 Legislature passed a law requiring Citizens (formerly Florida Residential Property and Casualty Joint Underwriting Associate) to base its rates on those charged by the Top 10 personal residential companies in the

• state. This concept was designed to have Citizens’ rates not competitive

with the authorized market place. A year later in 1996, an amendment was past changing the methodology to a top 20 approach. This process has evolved over the years and the following is a summary of how the process currently works.

Board Workshop December 8, 2002

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Rate Development Rate Development -

• PLA

PLA

1.

Selecting the Top 20 Companies: The Office of Insurance Regulation (OIR) provides Citizens a list of the top 30 authorized insurers in the state of Florida based on written premiums. Three separate lists are provided that represent homeowners, dwelling fire and mobile home type policies. Citizens staff then culls through the list of companies and eliminates companies that do not write standard coverage, such as high value dwellings, low value dwellings, force-placed coverage, etc. Citizens staff prepares the list of the top 20 companies for the rate analysis and submits the lists to OIR for approval.

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Rate Development Rate Development -

• PLA

PLA

• 2. Calculation of Premium: A premium is calculated for each company

selected based on the following characteristics: – HO3 (standard homeowners policy) characteristics:

• Building insured for replacement cost at $125,000
• Contents insured at $62,500 at replacement cost
• Masonry construction
• ISO protection class 4.
• 2% hurricane deductible, $1000 all other peril deductible
• Other structures insured for 10% of the building coverage amount
• Loss of use coverage at 10% of the building coverage amount
• Liability coverage with a limit of $100,000
• Medical expense coverage with a limit of $2,000
• Any applicable loss mitigation credits are not applied

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Rate Development Rate Development -

• PLA

PLA

– HO4 (standard homeowners policy) characteristics: Same as HO 3 with the following exceptions:

• No building Coverage.
• Contents insured at $25,000 at replacement cost

– HO6 (standard homeowners policy) characteristics: Same as HO 3 with the following exceptions:

• No building Coverage.
• Contents insured at $25,000 at replacement cost
• Loss of use coverage at 20% of the building coverage amount

– MH (standard homeowners policy) characteristics: Same as HO 3 with the following exceptions:

• Building insured for replacement cost at $25,000
• Contents insured at $12,500 at replacement cost

Board Workshop December 8, 2002

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Rate Development Rate Development -

• PLA

PLA

• 3. Determine County Average: A straight territorial average of premiums is

utilized to develop an average county premium for each company.

• 4. Rank the Top Premiums: For each county the top 20 companies are

ranked to determine the company with the highest average premium. The company with the highest average premium is then selected for that county.

• 5. Territorial Rate Mapping: Utilizing the selected company for each county,

that company’s territorial rates are then mapped to Citizens territories. Many insurers use territorial definitions that are similar to those used by Citizens in their Personal Lines Account; however, there are several insurers that have an independent set of territorial definitions, often based on zip codes. For example, it is possible that Insurer ABC has two territories that fall within a single Citizens multi-peril territory. In these situations, Citizens calculates a weighted average of these two territorial

• premiums. The weighted average is based on Citizen’s exposure

distribution of in-force policies.

Board Workshop December 8, 2002

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Rate Development Rate Development -

• PLA

PLA

• 6. Translate Premiums to Citizens Rates: Utilizing Citizens rating relativities

such as construction, cost of insurance, etc. the top 20 rates selected are mapped to Citizens rating tables.

• 7. Board Approval: The rates are presented to the Board for Approval.
• 8. OIR Review: Rates are filed under a “Use and File” procedure, meaning

that the rates are charged to the customers prior to OIR approval. If the OIR disagrees with the rate filings made, changes are made on the subsequent semi-annual filing made by Citizens. Rates are corrected going forward and not retroactively.

• 9. Certification: Twice annually steps 2 through 8 are performed to ensure

that Citizens rates comply with Statute. Based on the results, either a rate filing or a certification of rates is submitted to the OIR. Step 1 is performed once a year. 10.OIR Notification: The OIR notifies Citizens monthly of any activity

• ccurring among the top 20 companies.

Board Workshop December 8, 2002

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Rate Development Rate Development -

• PLA

PLA

The following are other key rating variables in the rate making process.

• 1. MGA Fees: All fixed policy fees or MGA fees that an insurer charges are

included.

• 2. New Home Discounts: Age of home discounts that insurers might offer

are not included since the majority of property insured by Citizens would not qualify for a new home discount. In addition, with the new Florida Building Code credits will assume the role a new home credit.

• 3. Insurance Relativity Curve: Citizens reviews its insurance relativity curve

annually to help assure that regardless of coverage amount requested the rates provided by Citizens on a whole are not competitive.

• 4. Animal Liability: Coverage is generally available in the voluntary market

but is not offered by Citizens. To account for this the indicated maximum company rates are reduced by 3% to reflect the coverage difference.

• 5. Other Relativities: Construction, deductible, protection class and other

relativities are reviewed on a regular bases to help ensure rates provided by Citizens are not competitive.

Board Workshop December 8, 2002

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Rate Development Rate Development – – HRA Residential HRA Residential

Wind Only Residential Rate Methodology – Top 20 Approach

In its last Session, the Florida Legislature amended Section 627.351(6)(d)3 to require that Citizens develop, jointly with the Office of Insurance Regulation, a wind-only ratemaking methodology to ensure that Citizens’ personal residential wind-only rates are actuarially sound and non- competitive with rates charged by authorized insurers. The actual language of the statute reads as follows: “Rates for personal lines residential wind-only policies must be actuarially sound and not competitive with approved rates charged by authorized insurers… To ensure that personal lines residential wind-only rates effective on or after July 1, 2004, are not competitive with approved rates charged by authorized insurers, the corporation, in conjunction with the office, shall develop a wind-only ratemaking methodology, which methodology shall be contained in a rate filing made by the corporation with the office by January 1, 2004...”

Board Workshop December 8, 2002

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Rate Development Rate Development – – HRA Residential HRA Residential

Citizens staff, along with actuarial staff from Insurance Services Office, which provides actuarial services to Citizens, has worked with actuaries and

• ther employees of the Office of Insurance Regulation to develop a

personal residential wind-only ratemaking methodology that complies with the statutory mandate. Understanding that there are no authorized insurance companies that write a wind only policy, the OIR and Citizens developed the following top 20 company wind rating methodology.

1.

Utilize the PLA Top 20 Information

2.

Develop Wind Percentages: Determine the percentage of wind premium to total premium by Citizens territory for each top 20 company and calculate the territorial averages of the top 20 companies.

3.

Develop Wind Premiums: The average territory wind percentage of the top 20 companies is then applied to the multi peril premium selected (highest) for each territory to determine the wind premium.

Board Workshop December 8, 2002

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Rate Development Rate Development – – CLA & HRA CLA & HRA Comm Comm

Commercial Rate Methodology – Top 20 Approach Insurance Services Office (ISO) loss costs are currently utilized for commercial rates; however, Citizens is exploring the use of a top 20

• approach. Staff is working with ISO to develop commercial residential

rates of the top 20 companies in concert with reviewing the Office of Insurance Regulation (OIR) approved ISO loss costs.

Board Workshop December 8, 2002

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Products & Rates Products & Rates

For more information on Citizens Products and Rates Contact:

Tony A. Loughman, CPCU, ARM Chief Underwriting Officer 1-888-685-1555, ext. 271

tony.loughman@citizensfla.com

Director of Underwriting and Agent Administration Citizens Property Insurance Corporation Jacksonville, Florida 1888-685-1555, ext. 271