Actuarial pricing, capital modelling and reserving

Pricing Squad


Issue 15 -- June 2017

Welcome back to Pricing Squad!

Thank you all for attending Pricing Semiar 2017 in London. For those who attended my "cat vs dog" session -- thank you for great questions and your participation.

Pricing Squad is a newsletter for fellow pricing practitioners and actuaries in general insurance.

Today's issue is about price matching and discovering your inner model guru.


Price matching

The best pricing strategy on the competitive market is not to follow a superior cost model.

Theorem

The best strategy ever is to use a superior cost model to identify segments which make money for the market as a whole. Then quote £1 under the market price in this segment.

Proof

Writing any business in a segment which is not profitable for the market as a whole is a bad idea.

In a profitable segment, any quote which is above market price will not convert (simplification but true enough).

In a profitable segment, any quote which is less than £1 below market price leaves money on the table.

q. e. d.

Go price match

This means that price matching or following the market is the way to go whenever possible.

To some actuaries it is not intuitive why would they not follow a superior cost model. But think about Winner's Curse. In a competitive market, and if the monetary value of entering into a contract is uncertain, the person signing up is often the most irrationally optimistic one. Price matching minimises Winner's Curse.

Case study

This major global insurer invested two days of work in improving three rating curves for a household product.

The objective was to align calculated premiums with the maximum of loss cost prediction and market premium minus £1. A batch of 10k market quotes scored with a loss cost model was used. A non-linear Excel model described in the January 2017 issue of Pricing Squad was deployed.

The expected improvement was a volume growth of 18% with loss ratio unchanged. This expectation was met by next months' actual figures.

To achieve a similar result using, for instance, advanced real time optimisation this insurer would have to invest 6-12 months of work and a six figure budget. (And at the end no one would understand how the new rates work.)

I have seen similar results delivered by price matching - real time and off line - at half a dozen other businesses.

Watch out for regressive legislation

Please keep in mind that price matching might not be allowed in your jurisdiction. Some countries interpret price matching as anti-competitive. My objection to this regressive belief is explained in a public consultation response to the Office of Fair Trading 2011 (http://www.theactuary.com/archive/old-articles/part-4/insurance-3A-unfair-trading-3F/). So, while price matching is great, do stay legal.


Do you want to be a model guru?

...
...
...

... want to continue reading?

Please provide your email to log in or to subscribe to Pricing Squad:

...
...
...