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Effective Price Modeling How to Discover and Implement Profitable Underwriting Factors

Effective Price Modeling How to Discover and Implement Profitable Underwriting Factors. Stephen J. Streff, ACAS, MAAA Consulting Actuary Streff Insurance Services www.streffinsurance.com 651-385-7500. Outline.

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Effective Price Modeling How to Discover and Implement Profitable Underwriting Factors

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  1. Effective Price ModelingHow to Discover and Implement Profitable Underwriting Factors Stephen J. Streff, ACAS, MAAA Consulting Actuary Streff Insurance Services www.streffinsurance.com 651-385-7500

  2. Outline Purpose: Explore pricing techniques with an emphasis on adjusting underwriting factors • Overview of pricing models • Demonstrate sample analysis in Excel • Model impact of new rates on profits

  3. Pricing Models • Macro models tell us how much the overall rates need to change. • Restate premium and losses to current level • Indicated rate change often used as guide; not always filed • By line, state; any finer and most models break down Historical Losses Projected Losses Trend for IBNR development and inflation Earned Premium Put past premium on current level Restated Premium

  4. Pricing Models • Micro models tell us where the specific rates need to change. • Help adjust discounts and surcharges • Can find new rating parameters, too (credit score, loyalty, claims free) • Good for transition markets when only some factors need adjusting • Used to make rating systems more dispersed, finer

  5. Macro vs. Micro • Both sample models achieve +5% overall increase • Macro moves all rates by the same amount • Micro models are flexible Rate Rate Macro Micro Risk Level Risk Level

  6. Database Essentials • Excel format is standard • Link premium and loss files by policy • Key items: premium, losses, policy # • Analysis depends heavily on quality of data • Pivot tables

  7. Sample Database • Midwestern home insurer; premium = $50 million • One underwriting year of data • No surcharges; only discounts (better marketing?) • Discounts for: Extra Info: Credit score Alarm Zip code Construction type Multi policy Mortgage free Agency Protection class New home Non smoker Policy status Coverage A, C & E Claim free Groups Policy form Deductible Loyalty Senior Year built Endorsements

  8. Common Database Adjustments • Cap losses • Group categories • Exclude catastrophes • Lookup tables • Rounding • Not necessary to adjust losses & premium

  9. Pivot Table Analysis • Look for trends in loss ratios, frequency and other statistics • Verify apparent trends • Make adjustments to discounts • Review impact of changes • Check reasonableness

  10. Impact Models • Some policies will renew; others won’t • Randomly model renewals • Is expiring business worse than renewals? • What about new business?

  11. Caveats and Warnings • Correlation does not prove causation • Do not over-react to indications • Watch data credibility • Need to be aware of marketplace

  12. No Database? Don’t Give Up • Even tiny companies can implement discounts • Random sampling of policies can help • Use your intuition • Smaller and frequent rate changes are best

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