Werner Ch 13

• 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 differentiate premium in personal automobile
• 5. Company actuary and regulator may disagree on ratemaking assumptions: E.g., loss trend

• 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

• 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

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.

• 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

• 1. Competitive comparisons
• 2. Close, retention, and growth ratios
• 3. Distributional analysis
• 4. Dislocation analysis

• 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

• 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

• 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

• 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

• 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

• 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 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

• 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