-
Describe what Regulatory Constraints are
Amount of regulatory scrutiny that can vary by jurisdiction and by insurance product
- High for PL Auto & WC
- Low for CL
-
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
- REGARDLESS OF INDICATIONS, MUST CHARGE RATES THAT COMPLY WITH STATE REGULATIONS
-
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
-
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
-
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 profi t associated with a change. Standard ratemaking analysis generally doesn't account for implementation costs or staffing changes.
-
Prior to finalizing a rate change, an insurer should consider both:
- 1. Cost-based rate indication
- 2. Marketing conditions
-
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 - 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
-
Describe why commercial entities have less incentive to cancel and look for a new policy
Commercial entities generally have less access to competitive price information and want to stay with carrier
-
Identify four techniques used for incorporating marketing considerations
- 1. Competitive comparisons
- 2. Close, retention, and growth ratios
- 3. Distributional analysis
- 4. Dislocation analysis
-
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:
- 1. How competitive rates are on average - i.e., all risks combined;
- 2. How competitive rates are for individual risks or groups - e.g., new homes, young drivers
-
Describe how competitiveness of different segments often studied via rate relativity comparisons
- Recent yrs: Rating algorithms more complex, more risk characteristics
- individual rate relativity comparisons less meaningful.
- Additive vs. Multiplicative
- Also use total Premium as comparison for grps with rate charac of interest
- indicates where competitive threats lay
- can unintentionally impact average premium of another var if one rate rel changes
-
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
-
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
-
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 significantly impacted by items other than price: E.g., Company loosens/tightens underwriting standards
-
If ratios look significantly worse for a particular segment despite similar for other segments, what does that mean?
- Segment may be more price sensitive
- Competitive rate comparisons aren't valid
- Something other than price is driving purchasing decision
-
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
- Comparison over time can help determine if competitive position is a recent development: Could indicate a major competitor is targeting the market
-
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
-
When trying to incorporate Marketing Considerations, describe what assimilating the information would imply
- Once actuarial indications and mktg considerations are known, must decide:
- 1. Take full indication or
- 2. Take different change and consider non-pricing solutions to improve profit (revised u/w guidelines &/or mktg strategies)
-
Briefly describe two systematic techniques for incorporating both marketing information and actuarial indications when proposing rates
- 1. Lifetime Customer Value Analysis
- Examin 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
- Objective to identify the rate change that best achieves the company's profi t and volume goals
|
|
