Actuaries Must Consider Homeowner Envy and Home Telematics in Future Pricing

December 13, 2013

To price next year’s insurance, property/casualty actuaries need to know what trends are emerging right now.

A wide-ranging discussion at the Casualty Actuarial Society Annual Meeting held in early November during a session on “Emerging Homeowners and Personal Auto Exposures” examined a host of trends in two of the industry’s largest lines of business.

Talk ranged from the prosaic – how hailstorms seem to prey upon homeowners experiencing new-roof envy at their neighbors’ claims from previous storms — to the visionary – autos that correct their own skids.

The new-roof proliferation has spawned a term, “neighbor-itis.” Homeowner envy has become a problem in the industry, panelists said, as hailstorms have pelted the Midwest in recent years. Damages have sprinkled replacement roofs throughout affected neighborhoods. Seeing the new roofs, neighbors want their insurer to get them one as well when the next storm hits.

Dialing up the volume on this envy are storm chasers – not the daredevils who stalk tornadoes with video cameras, but residential contractors who pursue homeowners after a storm, urging them to file claims alleging roof damage.

Many claims are legitimate, of course. But some aren’t, and their number seems to be increasing.

In some cases, insurers are minimizing price changes by reducing coverage. These insurers will only pay for the actual cash value of the damaged roof instead of replacement cost, said panelist Robert Curry, a Fellow of the Casualty Actuarial Society and assistant vice president and actuary at ISO’s personal property actuarial division.

And some insurers are raising deductibles, said panelist Kevin Christy, a Fellow of the Casualty Actuarial Society and chief actuary at Western National Insurance Group. A deductible needs to increase over time so the homeowner has “the same skin in the game,” noted Christy.

In yet another approach, insurers are trying to find ways to verify the actual age of a roof. Municipal building departments hold those records, but insurers have yet to figure out how to electronically tap that information.

But high-tech solutions may be at hand for homeowners insurance. More insurers are using complex predictive modeling to rate policies.

These models use a wide range of characteristics to tailor a rate to the individual homeowner, employing a sophisticated mathematical theory known as generalized linear modeling. Typical homeowner predictive pricing models draw on more than 70 variables, said Phillip Vigliaturo, an Associate of the Casualty Actuarial Society and actuary with Minnesota Department of Commerce Insurance Division.

And auto insurance may contribute the latest predictive wrinkle – telematics.

Telematics is the setting of rates by using a gadget that monitors how a car is driven. Drivers who floor it, speed and slam on the brakes end up with higher rates.

That can apply to homeowners insurance, once the long-awaited “Smart House” arrives. The same technology that enables a homeowner to turn on the air conditioning or preheat the oven via cellphone could help insurers adjust rates based on what the monitoring tells them.

If someone is almost always at home, for example, a broken washing machine hose will get noticed quickly, so the ensuing claim would be smaller. That would mean less risk for the insurer and a price break for the homeowner.

It may seem farfetched today, but at least one insurer is hedging its bet, Curry said, and has filed for a patent on a telematic device for the home.

High-tech solutions may seem far-fetched in homeowners insurance. But in the personal-auto world, they’re becoming business as usual, and there’s more on the way, as outlined by panelist Gary Wang, a Fellow of the Casualty Actuarial Society and consulting actuary at Pinnacle Actuarial Resources.

All new cars today have electronic stability control. This system monitors the direction in which the car is going and compares it with where the car should be going – as determined by the way the steering wheel is positioned, among other things.

If the car is not going where it is supposed to, its computers adjust the four brakes to try to set things right. The technology has been around since the 1990s, but was only required with 2012 models. As of today about half the cars on the road have it.

Here’s where the actuaries come in. If actuaries can figure out how to split their portfolio between the haves and the have-nots, they can determine how much of a discount the technology deserves. To set credible rates, actuaries need sufficient data to break a portfolio into many segments, with each segment large enough to make a credible prediction.

“I think now is the time to see if your program properly accounts for this feature,” Wang said.

The challenge: The vehicle identification number, the VIN, doesn’t immediately indicate whether a car has the feature. Actuaries will have to use the VIN to determine the vehicle’s make, model and series, then map that information to a list of vehicles that have electronic stability control.

The effort will be worth it, Wang said. The feature has driven down both claim frequency and severity, about 10% on all coverages except comprehensive. (Comprehensive coverage doesn’t answer when there is an accident claim.)

Wang predicts the next breakthrough will be forward collision warning – a phalanx of radars and sensors that know when a car has drawn too close to an object. The system warns the driver, through a signal or a twitch in the steering wheel.

Only about 2 percent of cars have this technology, but research shows it will be valuable. The Insurance Institute for Highway Safety predicts about half of all vehicles will have forward collision warning by about 2027. That means actuaries will be able to segment their book and credit the safer cars in about a decade.

Even social media may be affecting auto liability. Young people, traditionally the worst drivers, are now less likely to get behind the wheel. Only 73% of high school seniors get their license now, down from 85% in 1996. “They don’t have to drive to their friends’ houses,” said ISO’s Curry. “They hang out online.”

“Teens have taken to heart the advice to not text and drive,” Curry said. “And they’ve decided not to drive.”

Source: Casualty Actuarial Society

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