Werner Ch 13

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

1. Limit on amount of an insurer's rate change: Overall average rate change for the jurisdiction or change for individual customer or group2. 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 avoid3. 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 variables4. Prescribe use of certain ratemaking techniques: WA currently requires multivariate classication analysis be used to develop rate relativities if insurance credit score is used to differentiate premium in personal automobile5. Company actuary and regulator may disagree on ratemaking assumptions: E.g., loss trend

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

1. Take legal action to challenge regulation2. Revise underwriting guidelines to limit amount of business it considers underpriced3. Change marketing directives to try and minimize new applicants it considers underpriced4. Use a different allowed rating variable for a restricted variable if believes the different variable can explain some of effect associated with restricted variable

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

1. Changing rating algorithm can require significant systems changes: Complexity of change depends largely on extent of structural changes (e.g., num of rating variables, num levels within each), and 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

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

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.

Briefly describe five factors that commonly affect the insured's desire to renew or purchase a new policy.

1. Price of competing products2. Overall cost of product - if relatively cheap, less likely to shop around3. Rate changes - significant rate increase can cause existing insured to shop4. Characteristic of the insured - younger policyholder may shop more frequently5. Customer satisfaction and brand loyalty - poor claims handling or poor customer service

Identify four techniques used for incorporating marketing considerations

1. Competitive comparisons2. Close, retention, and growth ratios3. Distributional analysis4. Dislocation analysis

Describe the use of competitive comparisons

Compare premium to the premium charged by one or more competitors to determine competitive position: % Win is the percentage of risks an insurer beats the price of a competitor; Rank = Rank of Company Premium when compared to several competitorsAll information needed to accurately determine premium charged by competitor may 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 - e.g., new homes, young drivers

Describe the use of close ratios

Close ratio measures the rate at which prospective insureds accept a new business quote = # accepted quotes / Total # of quotesPrimary signal of competitiveness of ratesChanges in the close ratio often used to gauge changes in competitivenessImportant to view when rate changes are implemented

Describe the use of retention ratios

Retention ratio measures the rate at which existing insureds renew their policies on expiration = # of renewals / Total # of potential renewalsAll else being equal, renewal customers tend to be less expensive to service and generate fewer losses on average than new businessPrimary signal of competitiveness of ratesChanges in the retention ratio often used to gauge changes in competitivenessImportant to view when rate changes are implemented

Describe the use of growth ratios

Growth is a function of attracting new business and retaining existing customers = (New policies written - Lost Policies) / Policies at end of periodLow or negative growth can indicated uncompetitive rates and vice versaChanges in growth can also be signicantly impacted by items other than price: E.g., Company loosens/tightens underwriting standards

Describe the use of distributional analysis

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 timeDistributional information should be considered in context of general population of insureds and the target distribution of the companyCan look at target markets to determine if rates are competitive in these areasComparison over time can help determine if competitive position is a recent development: Could indicate a major competitor is targeting the market

Describe the use of policyholder dislocation analysis

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 retentionDislocation analysis highlights effects outside of threshold they believe will produce an unacceptable effect on retention: Company may then choose to revise proposed rate changeExpected dislocation can be shared with sales and customer service to help them prepare for the change

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

1. Lifetime Customer Value AnalysisExam profitability of an insured over a longer period of timeTakes retention into consideration2. Optimized PricingMultivariate statistical modeling techniques applied to develop renewal and conversion models: Customer Demand ModelsUse loss cost and customer demand models together to estimate expected premium volume, losses, and total profits for a given rate proposalTest several rate change scenariosObjective to identify the rate change that best achieves the company's profit and volume goals