Embracing By-Peril Rating: The Time Is Now to Do Things Better

By Robert Curry July 29, 2013

In the homeowners line, direct written premiums have increased steadily over the past five policy years, according to A.M. Best 2011 Financials. That’s indeed promising news for insurers.

But gaining a bigger share of the homeowners market isn’t just about writing more business; it’s about writing more profitable business. The tricky part in that is maintaining low losses and expenses — a feat that's proven difficult.

Writing more profitable business means figuring out what’s driving your homeowners losses, evaluating the perils that pose the greatest risk for policies in your book of business, and rating the exposure more accurately.

It’s about doing things better. It’s about moving beyond the traditional practice of rating based on all perils combined and, instead, using new approaches such as by-peril rating.

With by-peril rating, the separate loss costs developed for each peril allow you to analyze the portion of the total combined loss cost attributable to each peril. You can look at the effects of perils individually. That finer segmentation helps you rate your risks more accurately.

For carriers that have started using by-peril rating, the strategy seems to be paying off. We looked at A.M. Best market share data for the 25 carriers that made up a combined 28 percent of the total homeowners market in 2007 and found they increased their combined market share to 34 percent since adopting by-peril rating. But that group didn’t increase just market share; it also had lower loss ratios and combined ratios than companies not using by-peril rating.
As competition intensifies, the time is now to use new tools, such as ISO’s Homeowners By-Peril Rating Supplement, to help you more accurately assess your exposure and price policies. The Homeowners By-Peril Rating Supplement — available to participating ISO homeowners customers at no additional charge — is an alternate rating plan designed for insurers to use as an optional supplement to the standard ISO Homeowners Rating Manual classification and rating system.