Price Optimization

Question 1

describe price optimization

Answer 1

process of maximizing or minimizing a business metric using sophisticated tools and models to quantify business considerations

Question 2

differences between traditional ratemaking and price optimized ratemaking (2)

Answer 2

• 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

Question 3

criticisms of use of elasticity of demand in price optimization as unfairly discriminatory (3)

Answer 3

• 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

Question 4

possible regulatory responses to address price optimization (6)

Answer 4

• 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

Question 5

task force recommended practices for rate development (4)

Answer 5

• cost-based rates
• derived from sound actuarial analysis
• comply with state laws
• consistent with ASOPs

Question 6

definition of unfairly discriminatory

Answer 6

price differentials fail to reflect equitably the differences in expected losses and expenses

Question 7

considerations for rate transition rules (3)

Answer 7

• length of time to reach appropriate level
• size of upper and lower caps
• extent that capping one rate affects others