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
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
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
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
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
6
Q
definition of unfairly discriminatory
A
price differentials fail to reflect equitably the differences in expected losses and expenses
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
