# Pricing Squad

## 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.

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

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