Because of the low frequency but high severity
of earthquake losses, homeowners insurers have long found it
uniquely difficult to rate earthquake coverage.
In most states, historical loss data, on its
own, provides little or no indication of what losses might be
today if an earthquake struck.
Things have changed, however, with the
growing sophistication of catastrophe models. By applying
mathematical algorithms to data on seismic conditions and
building characteristics, these models can project the level of
losses likely to occur in defined areas from earthquakes of
certain magnitudes.
Modeled data lies at the core of AAIS's new
Homeowners earthquake rating plan, but that's only the
beginning.
“This
new rating plan includes features not found in other
standardized programs.”
— Greg Jaynes, AAIS chief actuary
AAIS actuarial staff has built on that data
to develop loss costs and rating factors that will allow most
carriers to price earthquake exposure more precisely than they
have ever been able to do.
That, in turn, could make earthquake
coverage a lot more attractive to homeowners who need the
coverage more than they think, but who might pay less than they
anticipated.
This opportunity for enhanced spread of risk
for a catastrophic peril is available to all insurers, whether
they currently use AAIS programs or not.
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While the new AAIS Homeowners earthquake
supplements expand the number of price points for policies
within a state, they do so while maintaining a relatively simple
procedure for rating policies.
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For each state, the supplements
provide six base loss costs, to be chosen as applicable:
one for most owner-occupied forms; one for tenants and
unit-owners forms; one for additional building coverages and
options; one for higher personal property limits; one for
higher loss of use limits, and one for association
deductible and loss assessment coverage.
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For owner-occupied forms, the building property base loss cost is multiplied by the
building property limit, then modified by a “frame
factor” (if the residence is of frame construction), an “HO
0005” factor (if the policy is based on that form), and a
deductible factor (per zone).
The results for the owners forms are modified by
factors based on number of stories, age of home, and in some
cases, loss mitigation features.
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Similarly, other applicable base loss
costs are multiplied by limits for related private
structures, ordinance/law coverage, and tenant’s
improvements, and by any increases in limits over standard
ratios for personal property or loss of use. (Under the
tenant’s form, the personal property limit is used.)
The results are modified by factors for frame
construction (if applicable) and deductible.
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The premium charges developed in the
steps above are added together.
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Similar procedures are used to arrive at
modified loss costs for association deductible and loss
assessment coverage under unit-owners forms.
In all, the new AAIS earthquake rating
procedure utilizes six tables, none of them bigger than half a
page, yet, taken together, they can establish hundreds of price
points per state. |
The latest Homeowners earthquake rating plan
is available for use by any insurer as a self-contained manual
supplement of rules, rating zones, loss costs, premium
modification factors, and supplementary rating information.
The plan features state-specific loss cost
base amounts and rating factors that vary by rating zone to
reflect a risk's location and type of construction, as well as
the policy form, amount of insurance, and deductible.
“This new rating plan includes features not found in other
standardized programs,” says Greg Jaynes, AAIS chief actuary.
“Among other things, we have developed
premium credits for frame construction, which is generally more
flexible than masonry construction and, therefore, more
resistant to earthquake damage. These ‘frame factors’ vary by
earthquake zone for greater accuracy.
“We’ve also introduced rating factors for
the age of a structure and the number of stories, as well as
premium credits for certain loss mitigation features on older
homes.”
AAIS utilizes the U.S. earthquake
catastrophe model developed by EQECAT, Inc., Oakland, Calif., to
generate the modeled data used to develop the base loss costs
for the plan.
EQECAT is one of the world’s first and
leading developers of catastrophe modeling applications. Its
U.S. earthquake model has undergone independent review by the
U.S. Geological Survey, California Geological Survey, and
Pacific Earthquake Engineering Center, and the California
Earthquake Authority has declared it to be “state of the art”
and suitable for public rate filings.
“Homeowners carriers of all sizes
can benefit from this
innovative
and practical approach to
rating earthquake coverage.”
— Paul Baiocchi, AAIS president and CEO
“In general, the use of modeled data has
produced little change on aggregate levels of loss costs for
states overall,” says Jaynes, “but they provide a better spread
of earthquake pricing among high, moderate, and low risks for
earthquake loss within states.”
Among other things, the use of modeled data
has allowed AAIS to expand the number of earthquake zones
(territories) within each state.
According to Jaynes, the biggest impact in
this regard has come in states where one might not expect it.
“The impact of the new earthquake zones in California is not
dramatic,” he says, “because the range of earthquake exposure in
that state has long been recognized as being from moderate to
high.
“The impact is more pronounced where there
are pockets of moderate to high earthquake risk in states with
generally low risk.”
Among the requirements of the new earthquake
plan, says Jaynes, is that it provides for a greater segregation
of risks without creating an unwieldy set of risk categories
that would be difficult for many carriers to implement.
“We didn’t want to turn 20 manual pages into
80,” Jaynes explains. “So, we looked at the initial results and
applied the ‘80-20 rule.’ What factors really make the most
difference?”
The result is a series of new state-specific
earthquake manual supplements that include:
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Six tables of base loss costs and rating
factors, also available as data sets in Microsoft Excel and
XML format;
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Step-by-step instructions for all AAIS
Homeowners policy forms, including coverage for an
association deductible and loss assessment, if earthquake
coverage is provided under a unit-owners form; and
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Zone assignments by ZIP Code.
For companies affiliated with AAIS for use
of its Homeowners Program, the manual supplements are being
filed countrywide with proposed effective dates ranging from
Jan. 1 through July 1, 2010.
A generic sample earthquake manual
supplement is being developed for review by interested companies
not currently using the AAIS Homeowners Program. To inquire
about reviewing a copy, contact Rick Maka, director of
marketing, at rickm@AAISonline.com, or by calling 800-564-AAIS.
“Homeowners carriers of all sizes can
benefit from this innovative and practical approach to rating
earthquake coverage,” says Paul Baiocchi, AAIS president.
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Tremors
and numbers 
