In a recent university study, statistics overwhelmingly proved that the vast majority of farm mutual Managers would rather go in for a root canal than conduct a rate review analysis for their company. Really? A university study? While I am kidding about any organized university study, I can tell you from my personal experience that most Managers really do hate the process of analyzing their rates. So, if you find yourself in this thought camp of dread, you are not alone. Yet, on a sincerely, positive note, I have also found that if a rate review is started from the correct perspective, the entire process becomes much easier, more bearable, and almost fun. The key is starting off “right” even before you begin!
1. Art, Science, or Gut?
Many Managers put off looking at rates until the “right time” or until they get “better” data. Face it. There will never be a perfect time to start, nor will you ever have enough data. Unless you have a crack team of accredited actuaries on staff backed up with a world class super computer; even then, the rates you come up with always will be a combination of art, science, and “gut” feeling. Here is where I want to give you a confidence boost and a dose of reality – The rates you come up with as a result of the process will never be absolutely perfect – but they will be better than what you have right now! Many times the toughest part of any journey, (even a rate analysis), is taking the first step.
2. Begin with “big picture” thinking!
I am amazed at how many times mutuals agonize over what particular action they should take – and nothing gets done or the process takes forever. This also is true… both with the rate analysis process and getting your new rates approved by the board! While mutuals who suffer from “agonitis” fear making a mistake, the real problem originates in a lack of direction, lack of clarity, and lack of a unified picture of future success. Here’s where your written 5-year Vision can be a life-saver! You already have one, don’t you? With your Vision done prior to your rate analysis, you already know what you are trying to achieve with your rate changes, how much $, and by when. With a written Vision, needed actions become much more apparent – and everyone is on the same page throughout the process. Your Vision will help to point out if you need to overhaul all of your rates or just the problem areas – and your board will have an understanding of where your ultimate rate change recommendation is coming from. Without a Vision, trying to achieve success in changing your rates is like shooting in the dark, trying to hit the bulls-eye, and keep everyone happy at the same time.
3. Order: Underwriting first, Rates second!
Here is a fact that often gets forgotten. If your mutual is using inadequate underwriting practices, any time spent analyzing your rates will be frustrating. Make sure you shore up any underwriting changes and factor them in BEFORE you start work on your actual rate numbers.
4. I.T.V. – More important than you might think!
I cannot underscore the importance of I.T.V. (Insurance-To-Value). While this could have been included under #3 above, I feel this subject is worthy of a point all its own. Some mutuals require no valuation tool to calculate the insured value amounts on dwellings or outbuildings, yet they want to set rates worthy of being competitive. If this is the case for you, you will never be able to get rates that are adequate AND competitive if your I.T.V. is not properly based on an objective and accurate valuation tool. By embracing I.T.V. and increasing values to where they should be (assuming the risks meet underwriting standards), many mutuals find they can gain the needed premium revenue without drastic changes to their rates!
5. Have you considered going to class? (…rating that is)
When it comes to outbuilding rates, many mutuals use a simple rate per thousand to calculate the outbuilding rate to be charged. This “one size fits all” rating methodology may be easy to work with, but it fails in two respects. First, it fails to generate enough overall premium on the lower quality structures with higher depreciation. Secondly, it often makes a mutual uncompetitive on the higher quality, higher-value structures with low depreciation.
A different approach to consider is to implement outbuilding rates based on classification. For example, the lower value buildings with higher depreciation might be classed separately and assigned a higher rate. Average buildings might be classed together and assigned an in-between rate. Finally, those higher quality, higher-value buildings with low depreciation might be assigned a lower rate. Of course, the criteria used for each class eligibility would need to be clearly spelled out in your underwriting rules.
By considering these important points before you begin to evaluate your rates, you will find your rate review energies higher, more focused, and your anxieties lessened!
To Your Success,
Jack C. Randall, CIC, PCLA, PFMM