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Other Considerations

Regulatory Constraints

  • Examples of rate regulation
  • Examples of responses by companies

Operational Constraints

  • Two examples
  • Simple cost-benefit analysis

Marketing Constraints

  • Relationship between
    • assets/images/2025/10/Other Considerations-1760327986889.webp
    • Blue = Profit based on price charged. For a fixed indicated cost per policy, they are directly proportional (also assuming volume is fixed)
    • Red = Volume = # of insureds willing to buy coverage at each price. (Demand is inversely proportional to price)
    • Green = Total expected profit, based on profit per policy and # of policies sold
  • Factors influencing purchase decision
    • Competitor's price
    • Overall cost
    • For Existing customers, rate changes
    • Customer satisfaction & Brand Loyalty

Traditional Techniques for Mark Considerations

I am the insurer. CDPD
- Competitive: my policies, his rates
- Distributional: 30% in state, 10% in book (grow/shrink by segment)
- Policyholder Dislocation: change on retention

  • Competitive comparisons
    • Obtain competitor rates
    • re-rate existing policies with my proposed & competitor's rates
    • Analyze if you are cheaper than competitor or certain segments of this market.
    • Challenges
      • Difficult to get Competitor's rates
      • Competitor's UW guidelines unknown
  • Distributional analysis
    • Identify which segments of book is growing/shrinking with time
    • How my market share varies by segment of book
    • e.g. if 30% drivers in state are 20-25 aged
      • but we have insured only 10% of those drivers
      • under-represented in the segment of market
  • Policyholder dislocation analysis
    • Impact of rate changes on existing customers
    • Quantify the distribution of rate changes (% or $ amounts)
    • Because customers with large changes are expected to have a lower probability of retention.
    • ACTION: Pro-active action, prep the customer for the increase. Try to retain ("You can perhaps increase the deductible to offset the rate increase")

Systematic Techniques

Lifetime Value (renewal probability, long-term profitability)
Optimized Pricing (price elasticity of new vs existing customers)

Insurers try incorporating marketing considerations in pricing decisions directly. E.g. Lifetime Value Analysis (Asset Share Pricing) & Optimized Pricing.

  • Lifetime Value Analysis
    • Probability of an insured over entire lifetime (assumption about renewal probability)
    • Expected Profitability over time
    • e.g. Benefit of writing young drivers at a loss in the short-term, and as customers when profitability improves
  • Optimized pricing
    • Multivariate techniques \(\to\) price elasticity of new & renewal customers based on their characteristics.
    • Price elasticity \(\to\) impact of rate change on close ratios & retention ratios.
    • New customers are more sensitive to price.
      • Existing customers, more friction (effort): shop for insurance and change carriers.
    • Test different scenarios of rate changes: how it will impact total profit and growth

Underwriting cycle

"Hard" \(\to\) "Soft" \(\to\) "Hard"

graph LR
        A["
            **Hard Market**
            ---
            *State:*
              - High Prices & Premiums
              - High Insurer Profits
            *Result:*
              - Low Growth (as high prices deter customers)
        "]

        B["
            **Soft Market**
            ---
            *State:*
              - Low Prices & Premiums
              - High Growth (as business is easier to write)
            *Result:*
              - Low or Negative Profits (due to price wars)
        "]

    A --
    "**Action**: Insurers lower rates to gain market share
    Reason: *Attract business with high profit margins*"
    --> B
    B -- 
    "**Action**: Insurers raise prices & restrict underwriting
    Reason: *Unsustainable low/negative profit levels*"
    --> A

    style A fill:#ffcccc,stroke:#b30000,stroke-width:2px
    style B fill:#cceeff,stroke:#005c99,stroke-width:2px
  • Profit & Growth tends to be cyclical in nature

Arbitrarily starting from the hard market

  • A "hard" market:
    • prices and profits are high
    • High prices so, growth is low
  • To attract more business at high profit levels, lower rates.
  • Urgently, all insureds lower rates to maintain competitiveness.
    • Price competitiveness drives down profits for all insurers, what we call a "soft" market
    • Prices are low, growth is high.
  • Since profits are low or negative, to increase profitability, restrict writing of business.
  • Eventually, all insurers raise prices \(\implies\) "hard" market