Transcript CAS Presentation, Nov. 2014

Price Optimization
Overview
Casualty Actuarial Society
Committee on Ratemaking
Price Optimization Working Party
November 2014
1
Summary
Introduction
Historical Practice
Current Practice
Points of consideration
2
Introduction
Ratemaking Process
–
–
–
–
Actuarial Cost Estimates
Goals
Resource limitations
External Environment
• Regulatory
• Competitive
– Brand/Reputation
– Target customers
Price Optimization helps quantify pieces
of the ratemaking process.
3
Introduction
Definition of Price Optimization
– The supplementation of traditional actuarial
loss cost models to include quantitative
customer demand models for use in
determining customer prices.
– The end result is a set of proposed
adjustments to the cost models by customer
segment for actuarial risk classes.
4
Evolution of P&C Pricing
2010’s
2000’s
1900’s
GLM’s
Customer
Demand
Analysis
Customer
Lifetime
Value
Price
Optimization
CURRENT
RECENT
One-way
Segment
Analysis
HISTORICAL
Overall Rate
Indication
Progression follows advances in science and technology
Since GLM’s, analytic efforts have gone beyond customer
costs.
5
Historical Practices
Making adjustments to the actuarially
indicated rates is not a new practice.
Often described as actuarial judgment.
Simplification
Segment
Exposure %
Actuarial
Indication
Mono-Line
42.78%
1.0000
Selected
1.0000
Consistency
Competitive
Disruption
Mulit-Line
57.22%
0.9151
?
Marketing
Process was not objective or quantified
Regulation
6
Current Practice
Key similarities
– Adjustments are made directly to filed and
approved actuarial risk classes; and,
– Adjustments are made with user-defined
business goals in mind.
Key differences from historical practice
– Market demand and customer behavior are
quantified instead of being subjectively
determined; and
– The effect of the rate deviation from the loss
cost on business metrics is mathematically
measured.
7
Current Practice
Reasonable
Profit and
Growth Goals
Regulatory
Considerations
Actuarial Loss
Cost Models
Optimization
Engine
Market
Considerations
/ Competition
Adjusted
Actuarial
Models
8
Current Practice
Goals determine which direction you
want to go
Optimized prices
Regulations determine how
objectives can be achieved.
Profit
Market considerations connect profit
and quantity
Optimization engine finds the prices that
best achieve your goals.
•
Cost-based
prices
Quantity
9
Points of Consideration
Historical methods of assessing impact of a rate change assume
overall distribution of risks will remain unchanged.
– Significant asymmetry regarding which customers will accept the new
pricing and which customers will choose to leave.
– New customers will not always have the same profile as customers lost.
– In the interests of actuaries to anticipate these changes.
Low-income customers
– Price optimization works at a rating factor level and income is not a
rating factor.
– Low income customers do not all have the same price sensitivity.
– For a given company, price sensitivity exhibited by customers to that
company is heavily dependent on that company’s prices, which can vary
widely.
Enables companies to measure multi-year customer costs.
10
Price Optimization Working Party
– Morgan Bugbee, FCAS, MAAA, Chair
– Bob Matthews, FCAS,
– Sandra Callanan, FCAS, MAAA
– John Ewert, FCAS, MAAA, CPCU, ARM, ARe
– Serhat Guven, FCAS, MAAA
– LeRoy Boison, FCAS, MAAA
– Christine Liao, FCAS, MAAA
11