Conceptual Use Options for the Vehicle Module for Physical ... · for the Vehicle Module for Physical Damage ... Conceptual Use Options for the Vehicle Module for Physical Damage

Conceptual Use Options for the Vehicle Module for Physical Damage

Built by Predictive Modelers for Predictive ModelersTM

Personal Auto: Conceptual Use Options for the Vehicle Module for Physical Damage | i

TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Using the ISO Risk Analyzer® Personal Auto Vehicle Module . . . . . . . . . . . . . . . . . 4

Implementation and Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Appendix: Elements of the ISO Risk Analyzer Personal Auto Model Year and Symbols Program — Performance Charts . . . . . . . . . . 8

Personal Auto: Conceptual Use Options for the Vehicle Module for Physical Damage | 1

INTRODUCTION

The ISO Risk Analyzer® Personal Auto Vehicle Module for Physical Damage is a powerful analytic tool that uses vehicle characteristics to predict collision and comprehensive losses at a highly refined level. As part of the ISO Risk Analyzersuite of predictive modeling tools, the vehicle module for physical damage represents a significant evolution in the refinement and accuracy of vehicle symbolsand vehicle rating.

This document focuses on conceptual use options for the vehicle module for physicaldamage of ISO Risk Analyzer Personal Auto only.

Description of Product Offering and OutputThe ISO Risk Analyzer Personal Auto Vehicle Module for Physical Damage offers two options: • ISO Risk Analyzer Personal Auto Symbols— provides Symbols, filed Symbolrelativity, and model year relativity (each by coverage)

• ISO Risk Analyzer Personal Auto Vehicle Module Output— provides detailed component-level output with indicated relativity by coverage, as well as Symbols,filed Symbol relativity, and model year relativity (each by coverage)

ISO Risk Analyzer Personal Auto SymbolsThe ISO Risk Analyzer Personal Auto Symbols product provides 448 uniquely definedSymbols and corresponding rating relativities for comprehensive and collision coverage. The new Symbols are two characters in length, composed of a “price new”character (14 first-character symbols) and a “vehicle attribute” character (32 second-character symbols). ISO derives the ISO Risk Analyzer Personal Auto Symbols usingindividual vehicle attributes, such as body style, and performance and safety features,as well as information related to the manufacturer’s suggested retail price (MSRP).The new Symbols represent the combined predictive power of hundreds of vehiclecharacteristics distilled into a compact symbol representation.

The ISO Risk Analyzer Personal Auto Symbols are significantly more granular thanISO’s current Symbols produced using the Vehicle Series Rating (VSR) Program. The new ISO Risk Analyzer Personal Auto Symbols bring the power of predictive analytics to physical damage rating and allow you to easily enhance your vehicle ratesegmentation capability.


ISO Risk Analyzer Personal Auto Vehicle Module Output The ISO Risk Analyzer Personal Auto Vehicle Module is made up of relativities and components, with separate frequency and severity models built by coverage forcollision and comprehensive. Because of the heterogeneous nature of the different perils covered under comprehensive coverage, the comprehensive components aredeveloped separately for five peril groups.

Relativities

For each coverage, the set of relativities includes:• price new relativity• model year relativity• ISO Risk Analyzer Personal Auto Symbol relativity

You can use the relativities in your rating plans to determine relative loss cost relativities.

Components1

Components are logical groupings of the predictive input variables constructed fromVIN information and a number of third-party sources; they represent specific vehicleattributes. The components can be thought of as “super variables” you can use directlyas inputs in your predictive modeling efforts.

The collision components (two frequency and two severity) include:• body style and dimensions — a linear combination of parameter estimates forphysical characteristics of a vehicle, such as curb weight, bumper height, sizedimensions, and body style

• performance and safety features — values relating relative loss experience to a variety of safety ratings and scores; engine characteristics, such as displacementand horsepower; and standard and optional vehicle safety features

The comprehensive components (five frequency and five severity) include:• theft (including vandalism and fire)• weather (wind and water, excluding catastrophic losses)• animal• glass• all other perils

Daytime Running Light Discount for Collision Coverage

The ISO Risk Analyzer Personal Auto Vehicle Module for Physical Damage incorporatesa relative discount for vehicles equipped with daytime running lights. You can customize the discount value and the collision relativity based on your own internalmarketing and regulatory review.

1. Components are not provided as part of the base Model Year and Symbols Program.


Data SourcesISO built the ISO Risk Analyzer Personal Auto Vehicle Module for Physical Damageusing data from ISO’s Statistical Plan and information obtainable from the VIN ofeach vehicle. This information was supplemented by data from extensive third-partysources and includes vehicle characteristics such as:• physical characteristics — weight, dimensions, center of gravity, body style, and bumper height

• performance — engine size, horsepower, acceleration, and braking times• safety and crash test ratings• features — antilock brakes, daytime running lights• other — price new and coverage-specific data, such as theft rate applied to comprehensive theft peril models


USING THE ISO RISK ANALYZER PERSONAL AUTO VEHICLE MODULE

You can use the output of the vehicle module as stand-alone analytics to help classify,segment, and price your vehicle physical damage risks with confidence. Or you canuse the components as input to jump-start your own customized model, taking advantageof ISO’s extensive data acquisition, preparation, and variable selection work necessaryto build a reliable model.

Using the Vehicle Module “Right out of the Box”You can use the ISO Risk Analyzer Personal Auto Symbols and corresponding relativities and model year factors as guidance in vehicle rating or adopt them as replacements for your current vehicle rating program.2 ISO has filed the ISO RiskAnalyzer Personal Auto Model Year and Symbols Program with regulators country-wide. Regulatory approval will enable you to easily adopt the ISO Risk Analyzer Personal Auto Symbols to refine or replace your current vehicle rating programs.

The ISO Risk Analyzer Personal Auto Vehicle Module is designed in such a way that you can choose to adopt all three elements of the program (ISO Risk AnalyzerPersonal Auto Symbol, model year, and price new) or combine one or more ISO RiskAnalyzer elements with your current rating factors. For example, you can adopt thecomponents of the ISO Risk Analyzer Personal Auto Symbols Program and use yourexisting model year and manufacturer’s suggested retail price (MSRP) factors. Or youcan adopt the 2-character Symbol and continue to use your existing model year factors.

Analysis of the performance of the individual elements shows that each element canoffer significant risk segmentation by providing noteworthy ranking of risks. See theappendix on page 8 for graphs illustrating the performance of the individual elements.

Customizing the ISO Risk Analyzer Personal Auto Vehicle ModuleWhile the vehicle module for physical damage can serve as a stand-alone solution, italso provides information useful for building your own customized models. If youwere to build a model similar to ISO Risk Analyzer Personal Auto from scratch, youwould need to sort through hundreds of vehicle attributes and select those most predictive of loss. In developing ISO Risk Analyzer, ISO sorted through the candidatevariables to provide two sets of outputs that you can use to build a customized modelwith the rating variables you deem appropriate for your own business plan and areasof expertise.

2. An off-balance factor may be required for companies to incorporate ISO Risk Analyzer Personal Auto Symbols intotheir specific book of business on a revenue-neutral basis.


Using ISO Risk Analyzer Model Year and Symbols

The new Symbols are two characters in length, composed of a “price new” character(14 first-character symbols) and a “vehicle attribute” character (32 second-charactersymbols). Model year relativity is separate. You can incorporate either the individualcharacters of the Symbols or the levels of the model year element into your modelingprocess. Alternatively, you can appropriately transform the relativities associatedwith the elements by taking the log of the relativities and using them as inputs inyour modeling efforts. This custom model approach requires fewer exposures andlosses than if multiple vehicle characteristics data were used. Note: This customapproach can be adopted for modeling at the pure premium level only.

Using ISO Risk Analyzer Vehicle Components

Components help reduce the time and volume of data needed to build a reliable model,while still allowing you the opportunity to innovate and build differentiated vehicle rating programs. You can use components as predictors along with other rating variablesin your custom models. Additionally, you can customize in several ways for one-stage pure premium and/or two-stage frequency and severity modeling, providingmore flexibility in the design of your custom models.


IMPLEMENTATION AND IMPACTS

In this section, we’ll highlight overall effects of adopting the ISO Risk Analyzer VehicleModule Program and provide a few options that will enable carriers to minimize dis-ruptions to their overall books of business. The ISO Risk Analyzer Vehicle Moduleand Vehicle Series Rating (VSR) Symbols (VSR 27 and VSR 75) are programs designedto provide the best estimate of the relative risk of a vehicle. In aggregate, the VSR Symbols accurately reflect actual historical experience. However, the ISO Risk AnalyzerVehicle Module is able to enhance accuracy using vehicle characteristics to predict amore granular estimate of vehicle losses. Vehicle estimates differ between ISO RiskAnalyzer Personal Auto Symbols and the VSR Symbols Programs consistent with thedifferences in methodology. However, we do see that the results are within a reason-able range of each other.

0%

2%

4%

6%

8%

10%

12%

14%

0.40 to 3.65

0.35 to 0.40

0.30 to 0.35

0.25 to 0.30

0.20 to 0.25

0.15 to 0.20

0.10 to 0.15

0.05 to 0.10

0.00 to 0.05

-0.05 to 0.00

-0.10 to -0.05

-0.15 to -0.10

-0.20 to -0.15

-0.25 to -0.20

-0.30 to -0.25

-0.35 to -0.30

-0.40 to -0.35

-3.75 to -0.40

Relativity Change DistributionISO Risk Analyzer Personal Auto Symbols vs. Vehicle Series Rating Program (27 Symbols)

Physical DamageModel Years 1990—2008

% o

f E

xpo

sure

s

43%

92%

2.2 %

0.8 %

1.4 %

2.2 %

3.3 %

4.5 %

6.2 %

8.2 %

10.8 %

11.8 %

12.5 %

11.4 %

9.8%

6.9%

4.4%

2.0%

0.9% 0.7%

Relativity Range


To produce the relativity change distribution, ISO scored vehicles from industry dataas reported to ISO under both symbol plans. The ISO Risk Analyzer Personal AutoSymbols were off-balanced so that the effect would be revenue-neutral on the industrydata scored with VSR Symbols. In terms of rate impact, the following points shouldalso be considered: • Rate changes will result from rerating existing business. When rating new business under ISO Risk Analyzer Personal Auto Symbols, there will be no rate impact.

• The above relativity changes are representative of the expected physical damageloss cost change, given all other rating factors are kept the same.

• The rate impact on the policy overall will be less if you consider the liability portion of the loss costs, which will be the same under both symbol plans.

• You may consider other ways to limit the rate impact due to introducing ISO RiskAnalyzer Personal Auto Symbols. For example, for prior model years, you could compare the relativities for the VSR Symbol and the ISO Risk Analyzer PersonalAuto Symbol and cap that difference.


APPENDIX

Elements of the ISO Risk Analyzer Personal Auto Model Year and Symbols Program — Performance ChartsThe graphs in this appendix reflect the ranking of the loss ratios (observed/predicted)of each of the elements — model year, manufacturer’s suggested retail price (MSRP),and second character — by collision and comprehensive. High estimated risks (asreflected by the levels of the elements on the x-axis) correspond well to high observedloss ratios (y-axis); low relative estimated risks correspond well to low observed lossratios for each of the elements evaluated. The loss ratios in each of the graphs are calculated on a holdout test data set. Model year relativities are monotonically decreas-ing from model year X+1 to X-12, X-13; MSRP relativities are monotonically increasingfrom symbol A to symbol N; second-character relativities are monotonically increasingfrom symbol A to symbol 9. The bars in the graphs show the percentage of exposuresat each level of the element being analyzed. The noteworthy ranking of risks by eachelement points to the potential for significant lift by adoption of individual elementsof the ISO Risk Analyzer Personal Auto Model Year and Symbols Program.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0

5

10

15

20

25

X-13, ...X-8 to X-12X-7X-6X-5X-4X-2, X-3X, X-1X+1, X+2

Exposures (%) Model Year Loss Ratio

Mo

de

l Yea

r Lo

ss R

atio

Re

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ISO Risk Analyzer Personal AutoCollision Model Year Loss Ratio Relativities

Exp

osu

res

(%)

Model Year


0

2

4

6

8

10

12

14

16

Y-9XWVUTRPL-N J-KG-H A-F0.9

1.1

1.3

1.5

1.7

1.9

Exposures (%) Second-Character Loss Ratio

Se

con

d-C

har

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ISO Risk Analyzer Personal AutoCollision Second-Character Loss Ratio Relativities

Exp

osu

res

(%)

Second Character of Symbol

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Exposures (%) MSRP Loss Ratio Relativities

0

5

10

15

20

25

30

35

40

45

NL, M H, J, KF, GD , ECBA

MS

RP

Lo

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ISO Risk Analyzer Personal AutoCollision MSRP Loss Ratio Relativities

Exp

osu

res

(%)

MSRP Symbols


0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

2

4

6

8

10

12

14

16

18

Exposures (%) Model Year Loss Ratio Relativities

X-13

, ...

X-11

,X-1

2X-

10X-9

X-8

X-7X-

6X-

5X-

4X-3

X-2

X-1X

X+1, X+2

Mo

de

l Yea

r Lo

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viti

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ISO Risk Analyzer Personal AutoComprehensive Model Year Loss Ratio Relativities

Exp

osu

res

(%)

Model Year

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Exposures (%) MSRP Loss Ratio Relativities

NMKLJGHEFDABC0

5

10

15

20

25

MS

RP

Lo

ss R

atio

Re

lati

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ISO Risk Analyzer Personal AutoComprehensive MSRP Loss Ratio Relativities

Exp

osu

res

(%)

MSRP Symbols


0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Exposures (%) Second-Character Loss Ratio Relativities

0

2

4

6

8

10

12

X-9V-WUTRPNMLKJHG A-F

Se

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d-C

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tivi

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ISO Risk Analyzer Personal AutoComprehensive Second-Character Loss Ratio Relativities

Exp

osu

res

(%)

Second Character of Symbols

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