In previous posts we described how the Darwinian Economy is reshaping the insurance industry – how the twin forces of cheap capital and freely available technology have lowered barriers to entry, making the industry more competitive, and forcing insurers to search for new growth and profit opportunities. One of these opportunities presented itself nearly two years ago, and early adopters who recognize its potential stand to gain first mover advantage in the market.
An Update That’s Long Overdue
Commercial auto class plans currently used by much of the industry are based on actuarial methods that are over 40 years old. Much has changed in that time, and ISO’s new optional class plan accounts for new uses, types of vehicles, and exposures that have emerged over the past four decades.
The new ISO plan, introduced in 2015, provides much more granularity in a variety of rating variables, including vehicle age, cost, commercial segment, and vehicle purpose. ISO has also added a pricing factor based on the NAICS (North American Industrial Classification System) designation, to reflect the variety of vehicle uses across different industries.
This is a significant change that will require insurers to revise processes and systems, and possibly a portion of their business models. Recognizing this, ISO announced that the new reporting requirements will not be mandatory until 2019, and that the new class plan will not permanently replace the current ISO manual until at least 2021.
The Advantage of Agility
In the Darwinian Economy, the advantage goes to those who can adapt quickly to changes in their environment. Insurers have been given a gift – two more years to prepare for the transition to the new commercial auto scheme – and for those who can move quickly, there’s an opportunity to stake out a competitive advantage. Early adopters will have a much more granular view of the market, ahead of their competitors, giving them the knowledge to go after the most attractive market niches and build the most profitable books.
Those insurers that can test their books against the new rates and rules now will have a first look at whether current rates or the new optional rates will have the greater revenue contribution. And they’ll be able to build a state by state filing strategy that capitalizes on these differences during the transition period, filing immediately in states where the new optional rates provide an advantage.
The Program Writer Connection
For those companies writing programs and specialty insurance, the new rating program provides a more precise way to segment their markets, and a more accurate way to price their products. Actuaries will be able to analyze data at a more granular level, and identify the most attractive markets by NAIC code. They may find that certain segments they currently serve carry unacceptable risk profiles, while other segments present attractive loss ratios. The net result will be a tuning of books, adding programs that may not have been considered previously, and pruning away others.
Time for Systems to Adapt
In addition to changes in product offerings and pricing, the new class plan will require that systems support the more detailed rates and rules, and the associated reporting required of ISO subscribers. Systems that add these capabilities now will facilitate the “compare and contrast” analysis that all insurers will want to complete before the new rates and rules become mandatory. In addition, by accumulating the new more granular reporting data over the next two years, insurers using these systems will be able to get a clear picture of how their books will perform under the new class plan.
The new ISO commercial auto plan represents yet another Darwinian moment in which change presents both a threat and an opportunity. For those insurers ready to adapt quickly, advantages await.
Instec’s Approach to the ISO Update
The Instec Policy system will support the new class plan in the fall of 2017. We’re offering this update much sooner than our typical 90- to 120-day lead time to give clients as much time as possible to assess the impact on their books of business. Our system update will include all the new rating equations, and changes to statistical coding and input screens to accommodate the new variables ISO is adding. Since ISO is offering the new class plan as optional, Instec will maintain both the current and new plans in its system until the current plan has been permanently replaced.
Craig Harzinski has worked with insurance since 1980 working with various companies until finding his way to Instec. At Instec he worked on the base product before moving to Delivery. Craig is an expert in the regulatory environment, and is currently responsible for ensuring Instec clients receive timely bureau updates, problem resolutions and customized content.