If accident year loss ratios are going up, while policy year ratios are going down, what do you conclude? How helpful are 1998-1999 loss costs when you're underwriting and rating risks for 2005?
The property/casualty industry has long lived with limited, sub-optimal choices in loss experience information: Loss data that is class-specific is based on four-year-old information, while more current information is only available in aggregate.
MarketStance dramatically improves the choices available by making current, class-specific loss information accessible for two important lines of business-Workers Compensation and Commercial Auto. This is a single, synthesized loss experience measure that eliminates the often-conflicting picture provided by the multiplicity of loss ratio measures better suited to theoretical analysis.
The MarketStance loss ratio estimates follow a pure incurred loss ratio concept - that is, the ratio of premiums to losses, tracked on a calendar year basis (Jan-Dec), by year of occurrence and fully developed.
How we develop the loss ratios
We develop our loss ratios independently, based on facts from primary sources, and then use sophisticated modeling and analysis techniques to apply current economic indicators (such as medical cost inflation). We use development factors specific to each single-digit business classification to remove distortions caused by highly cyclical segments such as contractors.
For both Commercial Auto and Workers Compensation loss ratio estimates, we start with exposures.
The government produces very detailed and specific information on Commercial Auto exposures factors, including number and types of vehicles, range of operation and average miles driven. We append this information to the MarketStance database and add in information gleaned from carrier filings on loss experience. From this we get a set of loss ratios by various vehicle classes. This is then fed through a translator, which applies a weighted average (based on number and classes of vehicles) and produces synthesized loss ratios for individual business classifications.
For Workers Compensation, the MarketStance process parallels that used by the NCCI in its aggregate rate making. In contrast to the NCCI methodology, MarketStance works at the class level and from the bottom up to avoid class level divergence evident in the NCCI rates.
We pick up the most recent five years of data from class-specific bureau reports (Schedule Z), specifically information that is detailed to the individual WC class level (claims severity, number, total exposures/payroll, premium at manual and effective rates, losses as currently reserved, and by major loss categories).
We break down specific data, then separately trend and project frequency and severity (incorporating OSHA data and more up to date medical cost info). We factor in the most recent accident year data using aggregates of all classes by state, as well as calendar year data. Data is then aggregated to the overall class level and compared with calendar accident year data. Once run through the MarketStance classification translator, loss ratio estimates are available for each NAICS/SIC-plus business classification.
What does it mean to you?
With a reliable loss measure that's viewable in a number of practical and useful ways (by account size, by county, by class), you can easily fine-tune and adjust underwriting appetites and stance every year, or even more frequently, to reflect changing loss and cost trends. By understanding and adjusting to the dynamics of the marketplace, you can stay ahead of the performance curve and improve underwriting results.
1/18/05
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