Spring 2006: Notice of Enhancements
to AAIS Rating Information

AAIS is implementing enhancements to the rating information in many of its line of insurance programs. Specifically, AAIS will be introducing:

• Territorial definitions based on ZIP Codes;

• Loss costs for certain perils based on catastrophe modeling techniques; and

• New factor rating tables and procedures available on AAISdirect in Microsoft Excel.

These changes are being implemented on a countrywide basis; specific state filings and proposed effective dates will be announced by bulletin.

Many companies are refining their underwriting and rating processes by utilizing "geocoding" applications. These applications draw on a variety of external sources of geographic data to establish the location of a property in relation to coastlines, fault lines, flood plains, and other geographic features related to property/casualty risk.

Much of this information is based on ZIP Codes, so the definition of territories on the basis of ZIP Codes makes it easier to import and utilize data from different sources and classify a risk.

For several causes of loss--particularly earthquake, terrorism, and windstorm--there is general consensus that historical statistical data is best supplemented with information now available from catastrophe models. Among other things, the use of catastrophe modeling to refine loss costs makes it easier to introduce new rating criteria.

As these refinements in rating information are developed, the number of rating variables may significantly increase. As that happens, there is a growing imperative to provide rating factors and other information in standardized formats so it can be easily incorporated into company systems.

The implementation of ZIP Code-based territorial definitions commenced with the recent filing of revised earthquake loss costs in Kentucky; earthquake filings are being prepared for other states.

Initially, an Earthquake Manual Supplement will contain classification information for both personal and commercial lines programs. The supplement will include territorial definitions based on ZIP Codes, displayed in two different tables:

• A list of ZIP Codes in numerical sequence, which identifies the earthquake territory for each ZIP Code; and

• A list of earthquake territories, which lists the ZIP Codes within each zone.

This will make it easy to look up the rating information by ZIP Code or earthquake zone.

As rating information is further refined over time, the number of rating territories is likely to increase to reflect that, but the number of territories will always be significantly less than the number of ZIP Codes in a state. AAIS will monitor changes in ZIP Codes by the U.S. Postal Service, and will periodically update territorial definitions to reflect those changes. Filed manual rules will be in place to address how companies should deal with ZIP Code changes between updates.

As noted above, AAIS has begun revising loss costs using catastrophe modeling techniques provided by the nation's leading catastrophe modeling firms. AAIS's initial efforts have focused on addressing the earthquake and hurricane perils; other perils will be addressed in subsequent initiatives. The information will be provided at the ZIP Code level.

Over the spring and early summer of 2006, AAIS will begin filing revisions to terrorism rating information to reflect the use of catastrophe modeling data. While the current terrorism surcharges are expressed as a percentage of premium, the new terrorism rating information will be expressed as loss costs. Also, ZIP Code-based territories for terrorism will be introduced in some states, particularly those with large urban areas.

Modeling firms are also contributing loss costs by ZIP Codes for a series of rating variables to be used in the development of hurricane rating information in coastal states. Territories will be redefined and rating information within territories modified to reflect the enhanced rating information. In the near future, the rating of other perils will be similarly updated using modeling information. Bulletins will announce filing action in specific states.

Concurrent with the changes described above, AAIS will accelerate the implementation of factor rating in as many programs as possible. This will make it easier for companies to incorporate changes into their various systems.

Factor rating has already been implemented in the AAIS Homeowners, Mobile-Homeowners, and Farmowners programs. Factor rating is currently being developed for the AAIS Businessowners Program. Tables of factors and accompanying rating procedures will be provided to our affiliates on AAISdirect in standard Microsoft Excel files, which will make it easy to import and manipulate information as desired or needed.

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