Actuarial pricing, capital modelling and reserving

Pricing Squad


Issue 7 -- October 2016

Welcome back to Pricing Squad

Pricing Squad is a newsletter for fellow pricing practitioners and actuaries in general insurance. Enjoy, and let me know your comments and ideas for future issues.

In today's issue, you can learn useful ways to quantify winner's curse in your book and improve your product accordingly.


Life after Winner's Curse

If you attended Mark Rothwell's recent Staple Inn gig on the cognitive tricks our minds play, you would have been reminded about the dreaded Winner's Curse. This is when your company mostly binds the business whose risk you most underestimate.

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As Mark said, the first step to solve this embarrassing problem is to be aware of it.

The second step could be for example to apply the game theoretic price correction from the Winner's Curse Working Party 2009 Report. It looks like this:

If this solution is a no-no for your next pricing committee, here is what I tried instead.

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Ingredients:

  • A list of 1000+ market quotes
  • Your own own quote next to each market quote
  • Intermediate Excel & VBA skills

The chart below shows the average premium quoted by My Company (telematics private motor) and by the market in rural areas, towns and cities.

My Company's average prices are within 3% of the market price in every segment. On this basis alone, My Company's alignment to the market is strong, a good anti-Winner's-Curse strategy.

But once we zoom in on the distribution of price differences between My Company and the market in each segment, a very different picture emerges.

Clearly, our rates are more aligned with the market in rural areas and less aligned in the cities. Therefore, we must be experiencing increased Winner's Curse in the cities!

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