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Briefly describe five reasons U.S. Regulatory Constraints may cause implementation of rates different from what was indicated by ratemaking analysis
- 1. Limit on amount of an insurer's rate change: Overall average rate change for the jurisdiction or change for individual customer or group
- 2. Regulatory requirements depending on magnitude of requested change: May require company to provide written notice to insureds or hold public hearing; Company may choose lesser change to avoid
- 3. Prohibit use of particular characteristics for rating: Even if demonstrated to be statistically strong predictors of risk: E.g., credit score because perceived to be correlated with certain socio-demographic variables
- 4. Prescribe use of certain ratemaking techniques: WA currently requires multivariate classication analysis be used to develop rate relativities if insurance credit score is used to differentiate premium in personal automobile
- 5. Company actuary and regulator may disagree on ratemaking assumptions: E.g., loss trend
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Briefly describe four actions a company can take with respect to regulatory restrictions.
- 1. Take legal action to challenge regulation
- 2. Revise underwriting guidelines to limit amount of business it considers underpriced
- 3. Change marketing directives to try and minimize new applicants it considers underpriced
- 4. Use a different allowed rating variable for a restricted variable if believes the different variable can explain some of effect associated with restricted variable
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Briey describe two operational constraints that may make it difficult or undesirable for a company to implement the actuarial indicated change
- 1. Changing rating algorithm can require significant systems changes: Complexity of change depends largely on extent of structural changes (e.g., num of rating variables, num levels within each), and number of systems impacted (e.g., quotation, claims)
- 2. New rating variable may require data that has not been previously captured; May need to collect through questionnaire or visual inspection
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Briey describe the use of a cost-benefit analysis when an operational constraint arises
Performed to help determine the appropriate course of action when selecting a rate change. Can estimate the change in business, costs and profit associated with a change. Standard ratemaking analysis generally doesn't account for implementation costs or staffing changes.
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Briefly describe five factors that commonly affect the insured's desire to renew or purchase a new policy.
- 1. Price of competing products
- 2. Overall cost of product - if relatively cheap, less likely to shop around
- 3. Rate changes - significant rate increase can cause existing insured to shop
- 4. Characteristic of the insured - younger policyholder may shop more frequently
- 5. Customer satisfaction and brand loyalty - poor claims handling or poor customer service
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Identify four techniques used for incorporating marketing considerations
- 1. Competitive comparisons
- 2. Close, retention, and growth ratios
- 3. Distributional analysis
- 4. Dislocation analysis
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Describe the use of competitive comparisons
- Compare premium to the premium charged by one or more competitors to determine competitive position: % Win is the percentage of risks an insurer beats the price of a competitor; Rank = Rank of Company Premium when compared to several competitors
- All information needed to accurately determine premium charged by competitor may may be difficult to obtain.
- Companies generally interested in two levels of competitiveness: How competitive rates are on average - i.e., all risks combined; How competitive rates are for individual risks or groups - e.g., new homes, young drivers
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Describe the use of close ratios
- Close ratio measures the rate at which prospective insureds accept a new business quote = # accepted quotes / Total # of quotes
- Primary signal of competitiveness of rates
- Changes in the close ratio often used to gauge changes in competitiveness
- Important to view when rate changes are implemented
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Describe the use of retention ratios
- Retention ratio measures the rate at which existing insureds renew their policies on expiration = # of renewals / Total # of potential renewals
- All else being equal, renewal customers tend to be less expensive to service and generate fewer losses on average than new business
- Primary signal of competitiveness of rates
- Changes in the retention ratio often used to gauge changes in competitiveness
- Important to view when rate changes are implemented
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Describe the use of growth ratios
- Growth is a function of attracting new business and retaining existing customers
- = (New policies written - Lost Policies) / Policies at end of period
- Low or negative growth can indicated uncompetitive rates and vice versa
- Changes in growth can also be signicantly impacted by items other than price: E.g., Company loosens/tightens underwriting standards
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Describe the use of distributional analysis
- Companies may look at distributions of new and renewal business by customer segment: Normally includes both the distribution by segment at given point and changes over time
- Distributional information should be considered in context of general population of insureds and the target distribution of the company
- Can look at target markets to determine if rates are competitive in these areas
- Comparison over time can help determine if competitive position is a recent development: Could indicate a major competitor is targeting the market
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Describe the use of policyholder dislocation analysis
- Purpose to quantify the number of existing customers that will receive specific amounts of rate change: Use information to extrapolate how the rate change may affect retention
- Dislocation analysis highlights effects outside of threshold they believe will produce an unacceptable effect on retention: Company may then choose to revise proposed rate change
- Expected dislocation can be shared with sales and customer service to help them prepare for the change
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Briefly describe two systematic techniques for incorporating both marketing information and actuarial indications when proposing rates
- 1. Lifetime Customer Value Analysis
- Exam profitability of an insured over a longer period of time
- Takes retention into consideration
- 2. Optimized Pricing
- Multivariate statistical modeling techniques applied to develop renewal and conversion models: Customer Demand Models
- Use loss cost and customer demand models together to estimate expected premium volume, losses, and total profits for a given rate proposal
- Test several rate change scenarios
- Objective to identify the rate change that best achieves the company's profit and volume goals
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