Werner Ch 13

  1. Briefly describe five reasons U.S. Regulatory Constraints may cause implementation of rates di fferent 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 classi cation analysis be used to develop rate relativities if insurance credit score is used to diff erentiate premium in personal automobile
    • 5. Company actuary and regulator may disagree on ratemaking assumptions: E.g., loss trend
  2. 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 diff erent allowed rating variable for a restricted variable if believes the di fferent variable can explain some of e ffect associated with restricted variable
  3. 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 signifi cant 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
  4. Briey describe the use of a cost-benefi t 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 profi t associated with a change. Standard ratemaking analysis generally doesn't account for implementation costs or staffing changes.
  5. Briefly describe five factors that commonly a ffect 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 - signifi cant 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
  6. Identify four techniques used for incorporating marketing considerations
    • 1. Competitive comparisons
    • 2. Close, retention, and growth ratios
    • 3. Distributional analysis
    • 4. Dislocation analysis
  7. 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
  8. 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
  9. 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
  10. 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 signi cantly impacted by items other than price: E.g., Company loosens/tightens underwriting standards
  11. 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
  12. Describe the use of policyholder dislocation analysis
    • Purpose to quantify the number of existing customers that will receive specifi c amounts of rate change: Use information to extrapolate how the rate change may affect retention
    • Dislocation analysis highlights e ffects outside of threshold they believe will produce an unacceptable e ffect 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
  13. Briefly describe two systematic techniques for incorporating both marketing information and actuarial indications when proposing rates
    • 1. Lifetime Customer Value Analysis
    • Exam profi tability 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 profi ts for a given rate proposal
    • Test several rate change scenarios
    • Objective to identify the rate change that best achieves the company's profi t and volume goals
Card Set
Werner Ch 13
Exam 5 TIA Werner Ch 13