Actuarial pricing, capital modelling and reserving

Pricing Squad

Issue 16 -- July 2017

Welcome back to Pricing Squad!

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

Today's issue is on measuring strength of pricing factors.

You can also read a review of Non-Life Insurance Pricing with Generalized Linear Models by Esbjörn Ohlsson and Bjorn Johansson.

Factor strength

A typical pricing model has between 10 and 30 rating factors. This is plenty so I like to have a way to rank and quantify these rating factors.

One cool method is called "factor strength".

Factor strength has an intuitive interpretation. Strength 0% means the factor does nothing. Strength 30% means that on average the factor influences premiums by +/- 30%. And so on.

For example, if a portfolio is equally distributed across three regions rated -15%, 0% and +15% respectively then factor strength for "region" would be (15% + 0% + 15%) / 3 = 10%.

Here is how you calculate factor strength in five simple steps.

  1. For each level of this pricing factor take average premium with and without this pricing factor and then calculate their ratio.
  2. Calculate exposure weighted average of this ratio.
  3. ...

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