Price Optimization Flashcards

1
Q

describe price optimization

A

process of maximizing or minimizing a business metric using sophisticated tools and models to quantify business considerations

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2
Q

differences between traditional ratemaking and price optimized ratemaking (2)

A
  • with price optimization, market demand and customer behavior are quantified instead of subjectively determined
  • with price optimization, the effect of deviations from cost-based rates on business metrics is mathematically measured
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3
Q

criticisms of use of elasticity of demand in price optimization as unfairly discriminatory (3)

A
  • profits are increased by raising premiums for those less likely to shop
  • introduces a component to ratemaking that is unrelated to expected losses or expenses
  • can result in insureds with the same risk profile being charged different rates
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4
Q

possible regulatory responses to address price optimization (6)

A
  • determine which price optimization practices are allowed
  • define any constraints on the process (e.g. can only apply to larger classes)
  • give a specific definition of “actuarial indication”
  • develop guidance on the meaning of “not excessive, inadequate, or unfairly discriminatory”
  • require more transparency in filings
  • require reasoning for rates that deviate from actuarial indicated rates
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5
Q

task force recommended practices for rate development (4)

A
  • cost-based rates
  • derived from sound actuarial analysis
  • comply with state laws
  • consistent with ASOPs
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6
Q

definition of unfairly discriminatory

A

price differentials fail to reflect equitably the differences in expected losses and expenses

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7
Q

considerations for rate transition rules (3)

A
  • length of time to reach appropriate level
  • size of upper and lower caps
  • extent that capping one rate affects others
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