UNDERWRITING AND PRICING

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While recognizing the fact that, the marketers concerns are real, the Actuaries cannot be too eager to believe their arguments as to why the future will not be like the past. How many of these arguments have you heard from the marketers about why the future will be better?

If you have never heard them before, you better prepare yourself with some answers, because you will probably hear them soon if you are involved with personal insurance  pricing. Statements like “We are not writing that kind of business anymore. The quality of the business we are going to write will be much better.”

Somehow the empirical evidence that has been compiled over the years which shows that the loss ratio of new business is worse than the loss ratio of aged business

gets lost in this argument. Statements like “We have changed our emphasis in sales to writing the more expensive homes, because more expensive homes are simply better risks.”

“We used to write shacks, but now we write only mansions.” What they mean here is that, there exists such a thing as the objectively “good” risk and that it is totally unrelated to price. At some price every risk is a good risk and at some price, even the best risk is a bad deal. They forget, too, that when the shack burned down, it did not cost a lot to replace it. The mansion that burns will cost millions to replace.

“We have just appointed a lot of new agents and they are going to give us much better business than our current agents.” This is a slight variation of the first example I gave, aimed here at the agents/brokers rather than the insured himself/herself. The rationale here is usually based on the loss ratios of the prospective agents and comes from their experience with carriers usually already in the agent’s office.

It is impossible to tell if the new insurance company will get the same business as the current companies or if it is being slated for the left over business. Another problem is that no mention is generally made about the agents remaining with the company. They do not just disappear in general.

“Except for the two large losses two years ago, business experience in this city would be good.” You cannot let that determine the price level. This kind of comment illustrates that there is a lack of understanding that single, large losses in fact do not drive the rate level indication. But I have never heard the opposite of this statement, namely, “Wow! we were lucky last year that there were no large losses, so I guess the rates should be increased a little to reflect that”.

“We need to keep the home owners’ rates lower so that the higher premiums we charge for motor vehicle insurance will produce a combined price that is competitive.” This is the parallel argument to “We better keep the motor vehicle rate low so that the combined package with home owner added in will be competitive.” Not a bad argument, but should not be applied concurrently.

“We cancelled all our bad agents and so the business we are going to get will be better”. This is similar to the first argument of getting rid of all the bad business, but now they just concentrate on the bad agent. This argument is often used as a reason for adjusting the indications prior to filing them with the regulatory authority.

This way, the decrease in rates will be actuarially justified and the regulator will not

question the solvency of the company and the adequacy of rates. Of course, carrying this concept through to its ultimate conclusion, I would like to suggest that the regulator might be just a bit upset that so many agents were cancelled.

“Our sales representatives are better trained this year and are more capable of focusing on the service aspects of our product rather than just the price. In addition, our market place is now for the upper income people who do not care so much about the price and are more interested in service”. This is a fallacy or warped thinking. Upper income people did not get to be upper income people by not caring about how much things cost.

“How can the Actuarial indication be so high for home owners’ insurance? I just looked at the last 7 months of agents’ calendar year experience and the loss ratio was great. This is not reflected in your indications which are all outdated”.

This argument suggests that the marketing staff need more education in the area of understanding Actuarial indications. My favorite is, “You Actuaries live in an ivory tower and so of course you have no concern for the problems we face out there in the real world.”

Where do actuaries live? In space? And I am sure that many of you could add to this list. I do not want to make light of these issues. Nor do I wish to under-rate the marketing departments in general. They have real issues, real concerns in the pricing of their products. It is the actuary’s challenge to use his/her available resources to help in the solution of the problem, not contribute to it.

I would like to say that there are a couple more aspects to pricing that we have to deal with besides the marketing and underwriting concerns. One could be the planning department which often has made plans or forecasts without the advice of the Actuarial department about attainable rate levels for the coming year and the attendant effects on the unit sales and hence the written premium.

You will experience pitfalls if planning becomes established as a part of the culture and worshipped and begins to drive the process. Another, often overlooked area within the insurance company that has an incredible effect on the pricing posture of a company is the claims department.

The Actuary must make the claims department aware that the actions they take today will be reflected in tomorrow’s prices, and any change they make in procedures should be communicated to the Actuarial department so they can be quantified prior to development of a premium level indication.

The other challenge comes from regulators, who must rely on the objective standards of Actuarial rate making and who must make decisions when sometimes faced with requests for decreases when increases are actually indicated. This is always the dilemma of the pricing Actuary. The indication, usually for a territory, is for an increase while the marketing department wants to decrease the rates.

But for another territory with similar indications they want to raise the rates sky high. How on earth do you accomplish this and still maintain integrity in the pricing system? Clearly the public would like to have lower insurance premiums, but the solvency of the insurance companies must be preserved or the low premiums will do them no good.

Whatever, the source of the pressure, be it underwriting, marketing, planning, or regulation, the Actuary must attempt in his/her role not to be the advocate of anything except the truth.

In conclusion, let me leave you with this thought about the marketing departments of many insurance companies. Do you know that the favorite “wine” in the marketing department is: Why do the rates have to be so high?

Note: In this column I offer general insurance information. Do not completely rely on this column in making insurance decisions. For specific guidelines email; insuculture@gmail.com

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