PRICE OPTIMIZATION

Question 1

SECT A: PRICE OPTIMIZATION

COMMON COMPONENTS OF PRICE OPTIMIZATION (3)

Answer 1

1. ELASTICITY OF DEMAND; CAPITALIZE ON MAX AMOUNT CONSUMER WILLING TO PAY
2. TO AUGMENT/ENHANCE COST-BASED RATES, INCORPORATE BUSINESS GOALS IN COMPETITIVE MARKET
3. APPPLICATION OF KNOWN CONSTRAINTS (EXPECTED CONSUMER BEHAVIOUR)

Question 2

SECT A: PRICE OPTIMIZATION

TYPES/LEVELS OF PRICE OPTIMIZATION (4)

Answer 2

1. RATEBOOK OPTIMIZATION (USE OF ALT RATING FACTORS) => SAME PREMS TO CONSUMERS WITH SAME RISK PROFILE
2. INDIVIDUAL PRICE OPTIMIZATION (BASED ON COST/DEMAND) => DIFFT PREM TO SIMILAR CONSUMERS
3. HYBRID OPTIMIZATION - RATE FACTOR BASED ON DEMAND MODEL (RETENTION, PROFIT) THAT OVERLAYS COST-BASED
4. CONSTRAINED (MAX/MIN LIMITS ON MODEL OUTPUTS) VS UNCONSTRAINED

Question 3

SECT A: PRICE OPTIMIZATION

ACTUARIAL CONCERNS (2)

Answer 3

(-) UNFAIRLY DISCRIMINATORY RATES IE. DIFFT PREM FOR SAME PROFILE
(+) MORE PRECISION IN RATEMAKING & ANALYTICAL MEASUREMENT OF WHAT-IF SCENARIOS

Question 4

SECT A: PRICE OPTIMIZATION

REGULATORY CONCERNS (2)

Answer 4

(-) BLACK BOX - DIFFICULT TO ASSESS HOW OPTIMIZATION INFLUENCED SELECTION
(-) VOLUMINOUS DATA - DIFFICULT TO INDEPENDENTLY REVIEW METHODS & CALCULATIONS

Question 5

SECT A: PRICE OPTIMIZATION

SOCIAL CONCERNS (2)

Answer 5

(-) RAISE PREM ON THOSE LESS LIKELY TO SHOP AROUND IE. LOW INCOME
(+) LOWER-INCOME MORE LIKELY TO SHOP AROUND

Question 6

SECT A: PRICE OPTIMIZATION

ACTUARIAL CONCERNS (2)

Answer 6

(-) UNFAIRLY DISCRIMINATORY RATES IE. DIFFT PREM FOR SAME PROFILE
(+) MORE PRECISION IN RATEMAKING & ANALYTICAL MEASUREMENT OF WHAT-IF SCENARIOS