Price Optimization Flashcards
Compare price optimization to traditional actuarial ratemaking
-Price optimization can be performed at the policy level (individual price optimization)
whereas traditional ratemaking typically rates by class (groups of insureds with similar
characteristics).
- Price optimization may charge a different price to two identical risk profiles which traditional ratemaking does not.
- Price optimization uses non-risk factors such as likelihood to shop for cheaper coverage.
- Price optimization may balance rate change with retention whereas traditional
ratemaking adjust rate to cover all future expected loss and expense - Optimization considers the retention and elasticity of the policyholder but traditional
doesn’t.
-The optimization results from models like GLMs rather than actuarial judgment.
- Optimization charges the max premium possible which traditional charges the actuarially
sound rate. (Maximum amount an insurer can charge while maintaining a given retention
level.) - Provides a more quantitative measure of rate adjustments as opposed to primarily
qualitative in traditional
Identify what could be used in a price optimized plan that might lead to prices that are unfairly discriminatory
Expected retention:
o The company might charge different premium to an insured if they are more likely to renew even though they have the same risk characteristics as an insured that is less likely to renew.
Elasticity:
o How much rate a customer is willing to accept before they will look for a new policy. Customers such as wealthy customers who may not care about price as much will pay a higher rate than their true cost based rate.
Price elasticity of demand:
o Using any variable at the individual level may result in two insureds with the same risk profile being charged a different rate, which would be unfairly discriminatory.
Tenure / # of years with insurer:
* This might lead to unfairly discriminatory rates if the price optimization suggests that a
longer-tenured insured who is less likely to shop after experiencing a rate increase should
have their rates increased based solely on the fact that they probably won’t “shop” while
having to do with the actual underlying risk (hence unfairly discriminatory).
Propensity to file complaints or ask questions of the insurer:
o Insureds and consumers should be able to file complaints without any negative effects or different treatment by the insurer, as this would be unfairly
discriminatory.
Potential restraints a regulator could impose on a price optimized plan
-Make it illegal to use price optimization in rating
-Price optimization can only be used if it results in a price decrease
-Limit the amount of increase allowed (capping)
-Only allow for groups of a reasonable size, not individuals (Require a minimum number of risks in each classification group)
- The resultant price/rate after using price optimization should lie between the current rate
and indicated rate.
Disclosures a regulator may require from an insurer when price optimization is used in a rate filing
-Highest and lowest rate impact an individual receives due to price optimization.
-The rating factors on which price optimization was used, and the magnitude of the effect it had on those rating factors.
-Complete list of variables used in the price optimization model.
-A summary of all new and existing customers with the same risk profile who are charged a different premium.
-The price optimization model itself.
-The source of the data, data characteristics, and analysis methods used to arrive at the resulting prices.
-Differences in premium between a new policyholder and an existing policyholder of the
same risk profile and same coverage.
-Disclose which type of price optimization is being used (ratebook, individual, hybrid).
-Disclose the minimum number of risks in the classification group
Ratebook Optimization
Cost and demand models are utilized to adjust the factors in an existing structure. The model output consists of alternative selections of rating factors to help achieve the insurer’s business goals. According to the CAS, insurers who use this method will not charge different premiums to insureds with the same risk.
Individual Price Optimization
Creates a price based on cost & demand models at the individual policy level.
Hybrid Optimization
Creates a new rate factor based on a demand model that supplements a cost based rating algorithm. This additional factor can incorporate:
-expected retention
-profitability
-rate of change from current premium to the proposed premium
-premium volume
-expense
This additional factor may or may not be correlated with expected costs
Traditional Approach to Ratemaking
Qualitative Assessment
Basis for adjustment to rate is Insurer judgment
Price Optimization Approach to Ratemaking
Qualitative and quantitative assessments informed by analysis of risk related and non risk related data
Automatic, systematic analysis (modeling)
