price optimization

Question 1

Items used in price optimization not used in traditional ratemaking (2)

Answer 1

GLM

big data (sophisticated tools to quantify business considerations)

Question 2

Define price optimization

Answer 2

Process of maximizing or minimizing business metric (profit)

Question 3

Define constrained optimization

Answer 3

Set min & max limit on models output (min = current price + max = cost based rate)

Question 4

Define cost based rate

Answer 4

Traditional actuarial derived rate based on costs (loss + expenses)

Question 5

Rate vs Price

Answer 5

Estimate of future costs (cost based rate)

vs uses business decision (where do you want to grow)

Question 6

Define price elasticity of demand

Answer 6

1. ∆ in demand vs ∆ in price (Gas is low elasticity)

Question 7

3 types of price optimization

Rate book optimization vs individual price optimization vs hybrid optimization

how works

premium of same risks

type of model(s)

Answer 7

• how works: adjust rates in exisiting book
• vs price at ind level
• vs insert new rating factor over cost based algorithm
• premium of same risks: same
• vs might be diff
• vs might be diff
• • type of model(s): Cost&Demand
• vs Cost&Demand
• vs Demand

Question 8

Traditional ratemaking vs Price optimization

Answer 8

1. Applied at rate class level vs can be applied to individual premiums
2. model: Cost based pricing vs used demand model
3. indicated rates: Subjective deviation from indicated rate vs quantitative model deviates from indicated rates
4. pricing: Same for same risk vs maybe different for same risk
5. regulators : acceptable vs maybe unacceptable

Question 9

Define unfairly discriminatory & groups often discriminated against

Answer 9

Price differences don’t reflect loss cost differences–>same risks have different premiums

Race, salary

Question 10

Aspects of price optimization that cause unfairly discriminatory rates aka same risks have different premium

Answer 10

1. Demand model (price elasticity)
2. Propensity to shop

Question 11

Argue for price optimization (4)

Answer 11

1. NOT unfairly discriminatory – (doesn’t discriminate vs low income bc they are more likely to shop)
2. NOT unfairly discriminatory (rate book optimization – same risks have same premium)
3. Limits policyholder disruption (premium transition has smaller rate swings)
4. More accurate rates (quantitative model instead of judgement to deviate from indicated rates)

Question 12

Argue against price optimization

Answer 12

1. YES unfairly discriminatory (does discriminate vs low income bc they are less likely to shop)
2. YES unfairly discriminatory (Same risks have different premium/rates unrelated to loss costs)
3. Policyholder disruption (Large rate swings)
4. Regulators don’t have data to verify rates
5. No evidence of lowering long term costs of insurer

Question 13

Task force definition of unfairly discriminatory (3)

Answer 13

1. Price elasticity of demand
2. Propensity to shop
3. Retention adjustment at individual level

Question 14

Task force recommendations

Answer 14

1. Rates should be cost based
2. same risks should have same rate(except premium transition)

Question 15

Responses state regulator can take to address usage of price optimization

Answer 15

1. Ban PO
2. cap rate changes
3. only allow PO on large rate groups instead of individual level
4. require disclosures (DAM, rating factors impacted)

Question 16

Why price optimization may be permissible under ASOPs vs not permissible

Answer 16

permissable: If rates are not excessive, inadequate, or unfarily discriminatory

vs not permissable: same risks have different rates –> rate should be estimate of future loss costs