EXAM 5 SECTION E

uw guidelines marketing proxy

Rate Regulations

• Limit on rate change

• Requiring written notices to insureds receiving large rate inc

• Prohibit certain rating var

• Prescribe certain ratemaking techniques

• Revising ratemaking assumptions (ex: trend selections)

What can insurers do in response?

• Legal action → challenge regulation in court

• Revise _____ _____ to limit business at inadequate rates

• Revise _____ to lim business at inadequate rates

• Use _____ when var is prohibited

system resource cost benefit

Operational Constraints

• _____ Limitations

  • Cost to implement change in computer systems

• _____ Constraints

  • Cost of additional resource needed

  • Ex: new rating var needs specialized staff to collect data

_____ _____ Analysis: compares inc profit vs cost of implementation

profit

Marketing Considerations:

• Higher Price →

  • Higher profit (assuming fixed volume)

  • Lower volume

  • Expected _____ inc at first, then dec

purchasing decisions

Factors that influence _____ _____

• Competitor prices

• Overall cost of product

• Rate changes

• Insured characteristics → sensitivity to price

• Customer satisfaction & brand loyalty

relative dec attract expected dramatically

New LOB investing in marketing to grow business

• Should develop rate based on typical variable costs, and not the actual high marketing expenses?

A: New business → low prem → marketing costs high _____ to prem

• As business grows, marketing cost ratio will _____

• If full marketing costs used:

  • Rate too high to _____ new business

  • Doesn’t reflect costs _____ for future policyholders

  • Rates dec _____ in next few years → volatile

lifetime value analysis persistency

_____ _____ _____aka Asset Share Pricing

• Looks at profitability of insured over lifetime rather than only when rates are in effect

• Recognizes _____

• Loss & expense diff between new & renewal business

uw cycle

• Hard Market → high price/profit, slow growth

• Some insuer lower rates to attract more business

• All insurers lower rates to maintain competitiveness

  • Soft Market → low price/profit, high growth

• Low / negative profit

  • Insurers restrict writing business

  • Raise prices to improve profitability → Hard Market

hard market

high prices & profits

slow growth

soft market

low prices & profits

high growth

fe fee per exposure

FE per Exposure / (1 - V -Q_T)

fe fee per policy

FE Fee per Exposure x Avg Exposure per Policy

add

New Base Rate (no rating factor changes)

Note: if no _____ fee → = Curr Base Rate x (1 + rate chg%)

proposed avg prem

Current Avg Prem x (1 + rate chg%)

accurate correlation changing

New Base Rate (w/ rating factor chgs)

1. Extension of Exposures

   • Pro: perfectly _____ proposed base rate

   • Con: need detailed exposure data

2. Approx Avg Rate Differential

   • Pro: don’t need detailed exposure data

   • Con: not perfectly accurate → exp _____

3. Approx Chg in Avg Rate Differential

   • Pro: only need to look at _____ var

   • Con: not perfectly accurate → exp correlation

seed base new rates add

New Base Rate → Extension of Exposures

• Re-rate using prop rating factors & seed base rate (ex: 1)

Denom = Avg Prem w/ _____ _____ & _____ _____ - Prop _____ Fee

exposure at base prop avg rel

New Base Rate → Approx Avg Rate Differential

• For each var, calculate _____-wtd Prop Avg Rel

  • Prop Avg Rel = product of prop avg rel for all var

• Exposure Correlation

  • Improve by weighing by var prem _____ _____ or adj exposure

Prop Base Rate = (Prop Avg Prem - Prop Add Fee) / _____ _____ _____

curr base rate curr avg prem - curr add fee off balance

New Base Rate → Approx Change in Avg Rate Differential

• Calculate chg in exposure-wtd Avg Rel Chg Factor

  • Exposure Correlation

    • Improve by weighing by var prem at base or adj exposure

• Inverse → Off Balance Factor

Prop Base Rate = _______ x (Prop Avg Prem - Prop Add Fee)/(_____) x ______

off balance

Avg rel underlying ind rates diff from curr rates → impacts total prem

• Off-set this impact by modifying base rate w/ _____ _____ Factor

prop curr inverse

New Base Rate → Approx Change in Avg Rate Differential

Calculating Avg Rel Chg Factor

• Var Prem (NOT at base)

  • For each var → Rel Chg Factor = _____ Rel / _____ Rel

  • Avg Rel Chg Factor = wtd-avg

  • Off-Balance = _____

• Var Prem at Base or Exposures

  • Avg Rel Chg Factor = Wtd-Avg Prop Rel / Wtd-Avg Curr Rel

    • Weigh first BEFORE dividing!

  • Off-Balance = inverse = Curr / Prop Avg Rel

fe loss

Minimum Prem: makes sure prem covers expected _____ and min expected _____

Steps:

1. Calculate avg prem for each level

2. Cap by min

3. Apply Offset to Base Rate

Base Rate Offset = Old min Prem / New min Prem

• Multiply by base rate w/ old min

curr prem rel off balance target

Rate Capping: when you cap impact of one level, need to make up prem!

• Check if any level exceeds cap:

  • Off-Balance = 1 / Total Rel Chg Factor wtd by _____ _____

  • Total Chg = _____ Chg Factor x _____ _____ x _____ Chg Factor -1

base rate chg factor x rel chg

Rate Capping → Cap Non-Base Level

• Inc base rate instead of adjusting each rel!

Solve for X = _____

• Total Prem inc by taget overall chg

• Capped non-base level → prem change by 1+cap

• Other levels → prem change by _____ AND ______ _____ factor

Final Base Rate = old base * X

Final capped non-base Rel = Curr Rel*(1+cap)/X

• Other levels = same as Prop Rel

rel adj factor 1+cap prop rel x

Rate Capping → Cap Base Level

Solve for X = _____

• Base rate inc by cap

• Total Prem inc by target overall chg

• Base level → prem change by 1+cap

• Non-Base level → prem change by:

  • Base rate chg _____

  • Rel Chg Factor

  • Rel Adj Factor X

Final Base Rate = Curr Base * (1+cap)

Final Base Rel = 1 (bc base)

Final Non-Base Rel = _____ _____ * _____

optimized pricing price elasticity rate chg close retention

_____ _____: uses multivariate techniques to est _____ _____ of new & renewal customers

used to predict impact of _____ _____ on _____ & _____ ratios

can test diff scenarios of rate change and how they’ll impact total profit & growth