Abstract:
Systems and methods provide optimized property risk ratings and, more particularly, optimized property risk ratings defined by evaluating ratings on a by peril basis. Systems and methods also price insurance products and underwrite insurance products using risk data that has been optimized on a by peril basis. A territory is subdivided into a plurality of regions determined in accordance with at least one predetermined factor. Loss costs representing historic costs for various insured perils are retrieved from a computerized database using a data processor. The loss costs are sorted on a per-peril basis for each of the regions using the data processor. Peril zones are created for each peril that represent related regions in which loss costs for a particular peril are roughly equivalent.

Description:
RELATED APPLICATION 
     This application claims the benefit of priority from U.S. Provisional Application No. 60/574,576, entitled “Systems and Methods for Optimizing Property Risk Ratings” filed May 27, 2004, the disclosure of which is expressly incorporated herein by reference in its entirety. 
    
    
     TECHNICAL FIELD 
     The present invention relates to systems and methods for optimizing property risk ratings and, more particularly, to optimizing property risk ratings by evaluating ratings on a by-peril basis. The present invention also provides systems and methods for pricing insurance products and underwriting insurance products using risk data that has been optimized on a by-peril basis. 
     BACKGROUND 
     Generally, insurance is an agreement by which an insurer, sometimes referred to as an underwriter, in exchange for consideration, undertakes to indemnify the insured party against loss, damage, or liability arising from certain covered risks, subject to certain conditions and limits. The consideration paid by an insured party is typically referred to as a premium, which is paid to keep the insurance in effect. In general, an insurance policy is a contract of insurance that defines the rights and duties of the contracting parties. A typical insurance policy includes limits on the amount of risk that the insurer will cover. 
     For the purposes of this application, an insurance product includes more than the insurance policy. It also includes services, distribution channels, and other components which may impact the customer experience. 
     One type of insurance is property insurance. Property insurance protects persons or businesses from financial loss caused by perils. Perils may include, but are not limited to, losses due to fire, water, earthquake, wind, explosions, aircraft damage (as when an aircraft crashes into a structure), lightning, hail, riot or civil commotion, smoke, vandalism, falling objects, theft, volcanic eruptions, and freezing. An insurance policy providing property insurance may cover some or all of these categories of perils. By paying a premium on a regular basis, a policyholder is therefore insured against a loss caused by a peril within the scope of the policy. 
     A current method typically used for pricing and underwriting property insurance generally uses an aggregate of loss costs resulting from all perils. In other words, all loss costs are summed over all perils, and an average loss value is used to help determine policy premiums for all policyholders. Loss costs refer to the amount paid by an insurance company when settling a policyholder&#39;s claim. This methodology, however, does not necessarily identify a loss experience for a portion of insured persons because many policyholders have a significantly higher or lower exposure to perils than the average policyholder. 
     An insurer might like to even more accurately assess risk exposure and to offer its customers premiums that are even more in line with the risks associated with customers&#39; exposure to different peril combinations. Insurance companies could achieve this objective with better information and processes to manage their risk exposure so that they can more accurately access their risk exposure and, in doing so, offer customers less likely to incur losses lower rates. 
     SUMMARY 
     Consistent with the present invention, a method is provided for forming peril zones for property risk ratings. The method comprises subdividing a territory into a plurality of regions determined in accordance with at least one predetermined factor; retrieving loss costs from at least one computerized database using a data processor, the loss costs representing historic costs for various insured perils; sorting the loss costs on a per-peril basis for each of the regions using the data processor; and creating peril zones for each insured peril using the data processor, the peril zones representing regions in which loss costs for a corresponding peril are roughly equivalent. 
     Also consistent with the present invention, a system is provided for forming peril zones to provide property risk ratings. The system comprises a processor; a module that subdivides a territory into a plurality of regions determined in accordance with at least one predetermined factor; a database that stores loss costs representing historic costs for various insured perils; a module that sorts the loss costs on a per-peril basis for each of the regions; and a module that creates peril zones for each peril, the peril zones representing regions in which loss costs for a corresponding peril are roughly equivalent. 
    
    
     
       BRIEF DESCRIPTION OF THE DRAWINGS 
       All descriptions are exemplary and explanatory only and are not intended to restrict the claimed invention. The accompanying drawings, which are incorporated in and constitute a part of this specification, illustrate embodiments of the invention and, together with the description, serve to explain the principles of the invention. In the drawings: 
         FIG. 1  is an exemplary diagram illustrating how a property in a territory is assigned rating factors that are used to calculate insurance premiums; 
         FIG. 2  is a block diagram of an example of a methodology that uses all peril data to create zones; 
         FIG. 3  is a graphical representation of a distribution of individual perils across a territory; 
         FIG. 4  is a diagram of a process for creating by peril-based all-peril zones; and 
         FIG. 5  illustrates a system consistent with the present invention. 
     
    
    
     DETAILED DESCRIPTION 
     Systems and methods consistent with the present invention provide insurance products based upon more accurate pricing models than conventionally used in the insurance industry. To provide an increased degree of accuracy, policies are defined on a by-peril basis to take into account the frequency and intensity of perils in a particular region when formulating premiums. By-peril is an improvement over traditional pricing methodologies because the method more accurately identifies individual peril contributions and associated costs than conventional methodologies. 
     Another benefit to the by-peril methodology is that by understanding the likelihood of a given set of perils for a structure located in a defined region, customers can make appropriate choices to minimize risk of loss and potentially the premiums. Thus, the by-peril methodology can be used to develop more individualized risk profiles for consumers, and allow the benefit of optimized pricing that better reflects their particular risk factors. 
     With the advent of improved computing capabilities, it is also practical to acquire loss data by peril in a geographical region, determine the loss costs caused by given perils, and use the data to more accurately determine insurance premiums. Systems and methods consistent with the present invention improve an insurance company&#39;s understanding of how different perils affect a given region. The insurance company may then use the data to more accurately define property insurance premiums. In particular, property insurance rates are determined based on the frequency and severity of specific perils within a given geographical region, as well as take into consideration customer factors such as replacement cost of the property, fire protection, and prior claim activity. 
     All loss data that is currently available to an insurance company is optimized through a series of processes that produce rating zones and rating plan factors. The by-peril method uses losses by peril to determine rating zones and rating plan factors. To create rating zones within a given territory, data is broken down geographically to a level much smaller than the whole territory. For example, a territory can be defined as a state. A state&#39;s loss cost data can be further broken down to the zip code, county, or census block level. Accordingly, a geographically defined region can be any convenient subset of the defined territory. At the zip code level, for example, data is further classified by type of peril. Specific peril data is then analyzed to create zones whose zip codes have similar magnitudes of loss for the given peril. 
     For example, consider a state that has water peril losses varying greatly across the state. Analyzing data at a zip code level can lead to a map that shows the relative magnitudes of water peril losses across the state. Geographically defined regions with similar magnitudes of loss costs within a particular territory can then be easily identified. 
     The magnitude of loss cost relativities is next determined for each peril. The by-peril territories are then combined to form new by-peril-based zones. The relativity magnitudes for these new zones can then be used in standard premium calculations. Alternatively, the new zones can be used as part of a new type of premium calculation that is by peril. 
     For the purposes of determining factors for rating plans such as replacement cost, fire protection, and claim rating, the data can be classified by type of peril. Then, for each peril, the data can then be analyzed to determine rating plan factors for each rating plan. The by-peril factors can be combined to form by peril-based all-peril factors, either for an entire state, or for each zone within a state, where we define zones as collections of geographically defined regions, which can be used in standard premium calculations. Alternatively, the by-peril factors can be used as part of a by-peril premium calculation. 
     Reference will now be made in detail to exemplary embodiments of the invention, examples of which are illustrated in the accompanying drawings. Wherever possible, the same reference numbers will be used throughout the drawings to refer to the same or like parts. 
       FIG. 1  is an exemplary diagram illustrating how a property in a territory is assigned rating factors that are used to calculate insurance premiums. In the following example, premiums are calculated based on an aggregate of all perils in a particular zone within a larger territory. For example, a property  110  is located in a geographically defined territory, which may be defined as state  100 . State  100  is divided into smaller geographically defined regions such as zip codes. Although zip codes are used in this example, any manner of division is possible. Property  110  is located in zip code  120 . 
     Next, a state base rate is derived from historical data. In particular, the state base rate may be determined by summing together all costs, including loss costs and insurance company expenses, experienced over a given time period, modified to reflect any changes expected between the time the data is collected and the time the proposed rates are expected to be in effect. To determine a premium for a particular region, such as zip code  120 , the following equation may be used: P=[Q*B z ]+C, where P represents the premium price for the insurance policy, Q is a product of rating plan relativities based on characteristics of the applicant that are not by peril and may vary depending on rating characteristics of a particular applicant, B z  is a base rate for a region z, such as zip code  120 , which is derived from all peril data, and C is an additive premium that may reflect endorsements and surcharges or discounts, for example. An endorsement is a document used to amend the coverage in an otherwise complete policy. A surcharge or discount may be an adjusted amount added to or subtracted from the premium to take into account other considerations. 
       FIG. 2  is a block diagram of an example of a methodology that uses all peril data to create zones. First, one determines from an insurance company&#39;s records peril data  205  representing loss costs for all perils that have occurred in a particular territory over a predetermined period of time. In particular, zones of combined perils are created by first identifying the costs of individual perils over a large territory typically the size of a state. In the present example, the territory being considered is a state. Peril data  205  includes data for all perils, where applicable, such as losses due to fire, water, earthquake, wind, explosions, aircraft damage (as when an aircraft crashes into a structure), lightning, hail, riot or civil commotion, smoke, vandalism, falling objects, theft, volcanic eruptions, and freezing. 
     Next, the method sorts peril data  205  into sorted peril data  210  based upon a geographical subdivision of the state, such as by zip codes. In particular, peril data  205  is broken down into a convenient and commonly used regions, such as zip codes. The use of states and zip codes are convenient units, but other geographical units may be used as well. 
     Finally, sorted peril data  210  is used to form boundaries to form zones  220 - 250 . The analysis used to form zones may involve statistical data smoothing techniques to create boundaries. Zones  220 - 250  represent groupings determined based on the magnitudes of the all peril data. 
       FIG. 3  is a graphical representation of a distribution of individual perils across a territory. The results are tabulated on the basis of geographically defined regions, such as a zip code. The individual perils are designated as P 1 , P 2 , and P 3 , which contribute different loss costs. The loss costs are defined as claims payments paid by an insurance company to settle losses incurred by policyholders. Loss costs are typically different for a given peril from one year to the next and therefore is usually calculated from multi-period data where one period of time is a year. 
       FIG. 4  is a diagram of a process for creating by peril-based all-peril zones. First, a territory, such as a state, is selected. Loss costs data  400  for all perils that have occurred in the selected state over a predetermined period of time are obtained. Next, loss costs data  400  for all perils are categorized by peril. For example, the selected state may have peril data for fires, water damage, and a category for all other perils. State peril data  405  includes all loss costs due to fires; state peril data  410  includes all loss costs due to water; and state peril data  415  includes all loss costs due to other perils. 
     Next, state peril data  405 - 415  is sorted on a per-peril basis by geographically defined regions. Accordingly, sorted state peril data  425  includes all loss costs due to fires sorted by a geographically defined region, such as a zip code; sorted state peril data  430  includes all loss costs due to water damage sorted by zip code; and sorted state peril data  435  includes all loss costs due to other perils sorted by zip code. 
     Sorted state peril data  425 - 435  is then used to divide the state into peril zones. For example, peril zones  437  include fire zones F 1  and F 2 ; peril zones  440  include water damage zones W 1  and W 2 ; and peril zones  445  include other peril zones O 1  and O 2 . Peril zones  437 - 445  may be determined by examining sorted state peril data  425 - 435  to create appropriate peril zone boundaries. For example, statistical techniques may be used to create boundaries. Alternatively, boundaries may be determined or adjusted by visual inspection. 
     Peril zones  437 - 445  may then be combined to form an overall by peril based all peril zone  447 , which includes zones A-F. Zones A-F represent areas that each share a common property insurance premium. Because zones A-F have been determined based on the magnitude of all perils in a particular zone, the insurance premium for each zone more accurately reflects the potential for perils to occur in a particular zone. 
     A basic by-peril premium equation may be expressed as follows:
 
 P   basic by-peril   =[Q][R   z   ][B   z   ]+C  
 
     P represents a premium that is arrived at through use of the equation. Q, which varies based on rating characteristics of a particular customer, represents a product of rating plan relativities that are not by-peril. R z  is a product of rating plan relativities that is derived from by-peril rating plans for a zone z. The rating plan relativities that are a part of R z  are derived by taking a weighted average of rating plan relativities that are by-peril with the weights equal to the by-peril magnitudes in the zone. R z  may be calculated for combined zones, or for an entire territory or state. In such a case, the weights are equal to the by-peril magnitudes in the combined zones or the whole state. R z  varies depending on rating characteristics of the applicant and the property. 
     The basic by-peril equation also incorporates a base rate, B z , which is derived from by peril information. B z  represents a zone base rate for zone z. B z  is the product of the statewide base rate multiplied by a zone relativity that is equal to a weighted average of by-peril territorial relativities with the weights equal to the by-peril magnitudes in the state. Finally, C represents an additive premium that may be added to the premium based on endorsements and surcharges, for example. 
     A modified by-peril premium equation may be expressed as follows:
 
 P   modified   =[Q][R   z   ]{[S   1   ][B   1z   ]+[S   2   ][B   2z   ]+ . . . +[S   n   ][B   nz   ]}+C  
 
     The modified by-peril premium equation further enhances the basic by-peril methodology by using factors that improve the resolution of the solutions even more than the basic by peril equation. In the modified by-peril premium equation, Q, which varies depending on rating characteristics of a customer, represents a product of rating plan relativities not by peril. R z  represents a product of rating plan relativities derived from by peril rating plans for zone z. The rating plan relativities that make up R z  are derived by taking a weighted average of rating plan relatives that are by peril, with the weights equal to the by peril magnitudes in the zone. R z  may be calculated for combined zones, or even for the whole state, in which case the weights are equal to the by peril magnitudes in the combined zones or the whole state. R z  varies depending on rating characteristics of the applicant and the property. 
     The factor S i  is a product of rating plans that are by peril for peril I, where i is equal to 1 through n, where n is the number of perils. S i  varies depending on rating characteristics of applicant. The factor B iz  represents a zone base rate in zone z, where i is equal to 1 through n, where n is the number of perils. B iz  is equal to the product of the state base rate for peril i (B i ) and the territorial relativity for peril i in territory z (T iz ). Accordingly, B iz =B i *T iz . Finally, C represents an additive premium that may be added to the premium based on endorsements and surcharges, for example. 
     System Configuration 
       FIG. 5  illustrates a system  500  consistent with the present invention. System  500  includes a server  505 , connected to a network  560 , including a CPU  520  and a memory  530 . Software loaded into memory  530  from, for example, a disk drive (not shown) at the direction of CPU  520  may be used to implement a program for determining insurance premiums for property. Various program modules may be stored in memory  530  as software for implementing the functionality of the present invention. For example, program modules may correspond to one or more of the steps described more fully above. While  FIG. 5  shows a network environment, one skilled in the art will recognize that the present invention may be implemented using any appropriate data processing system. 
     Network  560  provides communications between the various entities in system  500 , such as user terminals  570 - 590 . Network  560  may be a shared, public, or private network and encompass a wide area or local area. Further, network  560  may be implemented through any suitable combination of wired and/or wireless communication networks. By way of example, network  560  may be implemented through a wide area network (WAN), local area network (LAN), an intranet, or the Internet. 
     Terminals  570 - 590  allow a user to exchange information with server  560 . Terminals  570 - 590  may be any type of appropriate device for communicating with server  505  over network  560 . For example, terminal  570  may be a PDA running a program for communicating with server  505 , while terminal  580  may be a desktop type computer running a web browser for communicating with sever  505  via the Internet. Terminal  790  may be a standard landline telephone or wireless phone. 
     Users may access server  505  via network  560  to determine insurance premiums for property through a web browser running on, for example, terminal  580 . A website may include options for specify a customer&#39;s location, and may present the user with a series of screens prompting the user to make various selections. 
     Additionally, a user at terminal  590 , a telephone, may contact a customer service representative at terminal  550 . The customer service representative may make selections using software running on terminal  550 , and may send data to and from server  505 , when determining the customer&#39;s insurance premium. 
     The foregoing descriptions of the invention have been presented for purposes of illustration and description. They are not exhaustive and do not limit the invention to the precise form disclosed. Modifications and variations are possible in light of the above teachings or may be acquired from practicing of the invention. For example, the described implementation includes software but the present invention may be implemented as a combination of hardware and software or in hardware alone. Additionally, although aspects of the present invention are described as being stored in memory, one skilled in the art will appreciate that these aspects can also be stored on other types of computer-readable media, such as secondary storage devices, like hard disks, floppy disks, or CD-ROM; a carrier wave from the Internet or other propagation medium; or other forms of RAM or ROM. The scope of the invention is defined by the claims and their equivalents. 
     Other embodiments of the invention will be apparent to those skilled in the art from consideration of the specification and practice of the invention disclosed herein. The specification and examples should be considered as exemplary only, with a true scope and spirit of the invention being indicated by the following claims.