E.1 Other Considerations

Question 1

Examples of rate regulation in the U.S.

Answer 1

-Limiting the amount of rate changes: This can apply to the overall change on the book, or it can apply to individual customers. -Requiring written notices to insureds receiving large rate increases. -Prohibiting certain rating variables: e.g., credit score -Prescribing certain ratemaking techniques: e.g., multivariate techniques -Revising ratemaking assumptions: e.g., a regulator may disagree on loss trend selections, requiring the indication to be revised. This can cause indications to change or delays in implementation.

Question 2

Actions that insurers can take to respond to regulatory restrictions

Answer 2

-Take legal action: i.e., challenge the regulation in court -Revise underwriting guidelines to limit business at inadequate rates -Revise marketing to limit business at inadequate rates -Use proxy variables when a variable is prohibited

Question 3

Two types of operational constraints

Answer 3

Systems limitations consist of the cost to implement the change in the insurer’s computer systems. This cost depends on the extent of the changes and the number of computer systems impacted. An example of a resource constraint would be if a new rating variable requires the hiring of specialized staff to collect or process the data for the new variable. For example, specialized inspectors may need to be hired to visually inspect the insured property to obtain the necessary data. It may be prohibitively expensive for the insurer to hire these inspectors relative to the expected benefit of the additional information.

Question 4

Graph relating price, demand, and total profit

Answer 4

Question 5

Factors that influence an insured’s purchasing
decision

Answer 5

• Competitor’s prices
• Overall cost of the product
• Rate changes (for existing customers)
• Insured characteristics: e.g., how sensitive to prices are they
• Customer satisfaction and brand loyalty

Question 6

Difference between distributional analysis and
policyholder dislocation analysis

Answer 6

Insurers can use distributional analysis to identify which segments of the book are growing and shrinking over time, or how the insurer’s market share varies by segment of the book.

Policyholder dislocation analysis can be used to identify the impact of rate changes on existing customers. The calculation is to quantify how many customers will receive rate changes of different percentages or dollar amounts, as customers with
large changes may be expected to have a lower probability of retention.

Question 7

Describe Optimized Pricing

Answer 7

Optimized Pricing uses multivariate techniques to estimate the price elasticity of new and renewal customers based on the characteristics of those customers. These estimates can be used to better predict the impact of a rate change on close
ratios and retention ratios. With these estimates in addition to the loss estimates, the insurer can test different scenarios of rate changes and how they will impact the total profit and growth of the insurer.

Question 8

Steps in the underwriting cycle

Answer 8

• A “hard” market is when prices and insurer profits are high, but growth is low due to the high prices.
• In an effort to attract more business at these higher profit levels, some insurers will lower rates.
• This causes all insurers to lower rates to maintain their competitiveness in the market place. This price competition drives down the profit levels for all insurers. This is called a “soft” market when prices are low and companies are growing.
• In response to these low (or negative) profit levels, insurers restrict the writing of business and raise prices to improve profitability.
• Eventually, all insurers raise prices and the market again becomes hard.

Question 9

Differences between traditional P/C pricing and asset
share pricing

Answer 9

Traditional ratemaking techniques only consider the
experience of a single period of time. As such, they
fail to consider differences in persistency between risks. Persistency can have a significant impact due to loss and expense differences between new and renewal business. The asset share pricing model accounts for this by introducing multiple periods, persistency, and different assumptions for new and renewal business.