Brokers brace for individualized rating

A government insurer says it will be firing up its individualized rating system on Jan. 1, 2014. Are brokers ready for the change?

Saskatchewan’s government insurer is proceeding with individualized rating for home and auto insurance starting on Jan. 1, 2014.

SGI said it has been talking to its brokers about using more sophisticated analytics to obtain more individualized rating of risks for at least a year, with more education to come. Private insurers such as Intact, Economical and many others distributing through the broker channel have already transitioned to the use of data analytics.

“Individualized rating is looking at doing analytics on our data to find different rating variables or combinations of variables that are predictive of loss and that we have never seen before,” said Don Thompson, vice president of program management at SGI.

“We view this as helping the broker channel survive against direct writers. It’s a better, customer-focused way of rating in our minds. It better matches risk with the price of insurance. If we can’t match the sophistication of rating that direct writers have, we are going to lose business to those markets.”

Brokers are taking a wait-and-see approach. (continued.)


Their chief concern is about the transparency of the proposed new way to rate home and auto policies. Under the new system, published rating manuals will no longer be distributed, and the new rating system will include an online calculator.

“At the end of the day, we want the ability to still be the advisor for our customer,” said Garth Neher of Southey Agencies Inc. in Saskatchewan.  “As long as SGI can give us enough information so that I can say to my clients, for example, that when their houses fall down, their premium will go up $150 this year – I can at least have enough of a guideline so that I can truly advise you on what they are rating.”

Neher said brokers in the province are well aware of the trend of companies focusing more on the use of analytics for rating premiums. Brokers in the past have referred to the trend as “black box” underwriting, a reference to brokers seeing computer outputs without knowing how they are derived.

“The tools are getting more powerful, the databases are getting bigger and the analytic tools give you these statistical correlations that are harder to explain to a broker and a customer,” Alister Campbell, CEO of The Guarantee Company of North America, said at the Insurance Brokers Association of Ontario’s annual convention in 2012.

Neher said his biggest concern is that if the ratings get too individualized, ““we start losing the perspective of the fundamentals of insurance – the premiums of the many go to pay the losses of the few.”

In other words, will more individualized rating make premiums unaffordable for high risks and very low for excellent risks? Brokers are not sure how the ratings will all balance out once specific rating factors – such as age, gender, postal code, credit standing and others – start carrying more weight.

“There are so many different multipliers that they are putting into this rating system, and we’re not privy to that information,” said one broker in Saskatchewan who wished to remain anonymous. “Everything is going to be online. So, for example, we won’t see on the rate quoting system that you are surcharged 4%, for example, and I am credited 10%. There is no access to the rates. The formula’s in the computer.”

Thompson said brokers in Saskatchewan will in fact be receiving the general characteristics that drive the rate, including “a few key rating variables and what those discounts are.”

“We are going to have a bit of Q and A [with brokers] about how the different risk characteristics can change the premium,” he told Insurance Business. “We are also going to keep a few key rating factors visible to the brokers, so they can easily provide their customers alternatives on their rate based on a few of the key rating factors. They will still see them.”

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