E.1. Other considerations Flashcards
Examples of rate regulation in U.S.
Limiting amount of rate changes
Requiring written notices if large rate increase
Prohibiting certain rating variables
Prescribing certain ratemaking techniques
Revising ratemaking assumptions
Actions insurers can take to respond to regulatory restrictions
Take legal action
Revise underwriting guidelines to limit business at inadequate rates
Revise marketing
Use proxy variables when a variable is prohibited
Two types of operational constraints
Systems: cost to implement change in insurer’s computer systems
Resources: requires hiring of specialized staff
Factors that influence an insured’s purchasing decision
Competitor prices Overall cost Rate changes (if existing customer) Insured characteristics Customer satisfaction/loyalty
Optimized Pricing
Uses multivariate techniques to estimate price elasticity. Better predicts impact of rate change on close and retention ratios. Insurer can test different scenarios of rate changes and how they will impact profit and growth
Difference between distributional analysis and policyholder dislocation analysis
Distributional: which segments of the book are growing/shrinking over time
Dislocation: identifies impact of rate changes on existing customers
Steps in underwriting cycle
Hard (low growth, high prices/profits) To grow, insurers lower prices Other insurers respond Soft (high growth, low prices/profits) To make money, growth restricted, prices raised
Differences between traditional P&C pricing and asset share pricing
Traditional ratemaking techniques only consider experience of a single period of time – fail to consider differences in persistency between risks. Asset share accounts for this by introducing multiple periods and persistency, with different assumptions for renewals and new business
Steps to obtain new rates for an existing product
Select target overall average premium (or rate change)
Finalize rating algorithm
Select new rates for each rating variable
Select final additive amounts, if applicable
Derive final base rate need to achieve target premium
Fixed expense fee formula
Fixed expense per exposure / (1 - V - Q)
New base rate (extension of exposures)
Bp = Bs x (Pp - Proposed Fee) / (Ps - Proposed Fee) Bs = seed base rate Pp = Proposed average premium
New base rate (without rating factor changes)
Bp = Bc x (Pp - Proposed Fee) / (Pc - Current Fee) Pc = Current average premium
New base rate (using average rate differential)
Bp = (Pp - Proposed Fee) / Proposed average factor
New base rate (using change in average rate differential)
Bp = Bc x (Pp - Proposed Fee) x off-balance factor / (Pc - current fee)
Extension of exposures (adv/disadv)
A: Most accurate
D: Requires detailed data and calclations
