W&M Ch 13

Question 1

Briefly describe five reasons US Regulatory Constraints may cause implementation of rates different from what was indicated by ratemaking analysis

Answer 1

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 classification analysis be used to develop rate relativities if insurance credit score is used to differentiate premium in personal automobile
5. Company actuary and regulator may disagree on ratemaking assumptions
   - e.g. loss trend

Question 2

Briefly describe four actions a company can take with respect to regulatory restrictions

Answer 2

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 to minimize new applicants it considers underpriced
4. Use a different allowed rating variable for a restricted variable if believes the different variable can explain some of effect associated with restricted variable.

Question 3

Briefly describe two operational constraints that may make it difficult or undesirable for a company to implement the actuarial indicated change.

Answer 3

1. Changing rating algorithm can require significant systems changes
   - Complexity of changes depends largely on
   - -extend of structural changes (e.g. num of variables, num levels within)
   - -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

Question 4

Briefly describe the use of a cost-benefit analysis when an operational constraint arises

Answer 4

Performed to help determine the appropriate course of action when selecting a rate change. Can estimate the change in business, costs and profit associated with a change. Standard ratemaking analysis generally doesn’t account for implementation costs or staffing changes.

Question 5

Identify four techniques used for incorporating marketing considerations.

Answer 5

1. Competitive comparisons
2. Close, retention, and growth ratios
3. Distributional analysis
4. Dislocation analysis

Question 6

Describe the use of competitive comparisons

Answer 6

• Compare premium to the premium charged by one or more competitors to determine competitive position.
• -% Win is the percentage of risk 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 competitors may be difficult to obtain
• Companies generally interested in two levels of competitiveness
• -how competitive rates are on average - i.e. all risks combined
• -how competitive rates are for individual risks or groups - i.e. new homes, young drivers

Question 7

Describe the use of close ratios

Answer 7

• Close ratio measures the rate at which prospective insureds accept a new business quote (num of accepted quoes / total 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

Question 8

Describe the use of retention ratios

Answer 8

• Retention ratio measures the rate at which existing insureds renew their policies on expiration (num renewals / num 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

Question 9

Describe the use of growth ratios

Answer 9

• Growth is a function of attracting new business and retaining existing customers (policies at end of period / policies at beginning of period - 1.0)
• Low or negative growth can indicate 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

Question 10

Describe the use of distributional analysis

Answer 10

• 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
• Distributional information should be considered in context of general population of insureds and the target distribution of the company
• Can look at target markets to determine if rates are competitive in these areas
• Comparison over time can help determine if competitive position is a recent development
• -could indicate a major competitor is targeting the market

Question 11

Describe the use of policyholder dislocation analysis

Answer 11

• 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

Question 12

Briefly describe two systematic techniques for incorporating both marketing information and actuarial indications when proposing rates

Answer 12

1. Lifetime Customer Value Analysis
   - Examine 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
   - Test several rate change scenarios
   - Objective to identify the rate change that best achieves the company’s profit and volume goals