Future Fellows - June 2009
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Commercial vs. Personal Lines Pricing: What’s the Difference?
By Nicholas A. Merollo, Candidate Representative to the Candidate Liaison Committee

Candidates often ask what the differences are between commercial and personal lines. Having spent my actuarial career thus far split equally between commercial and personal lines pricing, I can say that the two products are quite different in everything from underwriting discretion to the regulatory environment. While commercial lines are more heavily focused on utilizing industry data, personal lines are more centered on using company data for setting rates.

For commercial lines, many insurers, if not all, utilize loss cost information from such advisory organizations as ISO (Insurance Services Office) for commercial package and auto pricing, and the National Council on Compensation Insurance (NCCI) for workers compensation pricing. Insurers usually elect to pick up annual loss costs that these advisory organizations provide and apply an expense provision to account for underwriting expenses. The exposure base (usually sales, area, or payroll) is applied to the rate determined by multiplying the loss cost by the expense load. Many states’ departments of insurance do not require insurers to file rate changes if they are picking up an advisory organization’s loss costs.   
Man working

Some insurers are starting to differentiate their commercial products by introducing various niches. Trying to solve the commercial insureds problems individually by tailoring products allows insurers more flexibility and freedom. Examples of various niches include programs for schools, human services, religious institutions, manufactured housing, and marina. Underwriters also have more discretion in commercial lines of pricing. Commercial underwriters have the ability to tailor rates to a specific insured by utilizing experience and schedule rating. Experience rating allows the underwriter to credit or debit premium based on the insureds historical loss experience. Schedule rating allows the underwriter to modify a class rate based on the special characteristics of the risk. For example, a commercial insured might receive a surcharge on his property insurance if the building contains flammable liquids or receive a credit if the building has a sprinkler system.      

Personal lines are a completely different animal when it comes to pricing insurance. Insurers use internal company specific data for independent ratemaking. While advisory organizations prepare loss costs for personal lines as well, they are only typically utilized by small insurers who do not have enough credibility in their data. Classification ratemaking in personal lines serves the same function as experience and schedule rating in commercial lines. While each individual insured isn’t rated independently, segmenting rating variables out by territory, age, gender, marital status, insurance score, etc. mirrors the same effect as individual risk rating.   

Underwriters also have much less freedom in pricing adjustments for personal lines. While underwriters may be able to place an insured in multiple underwriting companies, they must adhere to strict underwriting guidelines to do so. For example, an insured that has a home that is a coastal exposure may not be permitted to be underwritten in the best possible underwriting company of an insurer. Based on these guidelines, an underwriter has to exclude this insured from the best tiered company.   

From a regulatory standpoint, departments of insurance are much more critical with personal lines rate filings. The majority of states require prior approval for rate filings and the required documentation can be significant. Depending on the number of objections related to a filing, the amount of time to get one approved can vary significantly. Insurers often have to modify their proposed effective date of the rate revision to accommodate for this.   

Overall, working in both areas can be beneficial to one’s actuarial career. While one pricing sector is not necessarily “better” than the other, they are certainly very different. One is more tailored to individual risk rating and the other is based on classification rating. In recent years, personal lines have been working their way to the individual risk rating route with new product and rate enhancements.   


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