Price Optimization Flashcards
“Cost based” rate
Estimate of future cost associated with individual risk transfer
Actuarial indication
Actuarially sound estimate of the cost to transfer the risk
Rating cell
Combination of rating variables from a rating plan
Unfairly discriminatory rates
Exists if price differentials fail to reflect equitably the differences in expected losses and expenses
Price optimization
Process of maximizing or minimizing a business metric using sophisticated tools and modes to quantify business considerations; Use of big data
3 types of optimization in ratemaking
Ratebook
Individual Price
Hybrid
Ratebook optimization
Cost and demand models utilized to adjust factors in existing structure; CAS believes this method will not charge different premiums to same risks
Individual Price optimization
Creates price based on cost and demand models at individual policy level; more common in US retailers, overseas insurers
Hybrid optimization
Create new rate factor based on demand model that supplements cost based rating algorithm, incorporating retention, profitability, expense, premium volume, rate of premium change
Major difference between traditional and price optimized ratemaking
Market demand and behavior are quantified
Impact of deviation from cost-based rate calculated
Price elasticity of demand
Price elasticity of demand
Impact of a price change on quantity demanded
Price optimization problems to regulators
Challenging to review rates - not clear how optimization influenced selections
Large amount of information
Do not have necessary data for independent evaluation
More reliance on insurers for information
Consumer Federation of America stance on optimization
No evidence it improves stability, reduces long term costs, or limits disruption
Critics of optimization
Same risk could have different rates
Involves charging highest possible price
III stance on optimization
Provides more precision in process associated with pricing; allows insurers in an analytical way to deal with what-ifs
