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ocac07
March 8th 2007, 03:26 PM
Can anyone give me some idea about some factors that affects pricing in auto products? Tnanks.


ocac07

wat
March 8th 2007, 04:13 PM
Can anyone give me some idea about some factors that affects pricing in auto products? Tnanks.


ocac07

You likely won't find an answer to this question in the CAS 3 forum.

I'm not taking CAS exams, so you'll have to forgive me if I don't get it right, but I thought CAS Exam 5 was the pertinent exam - ratemaking. In the upper-level exams, there will be more discussion on factors that affect property & casualty rates, mostly because exams that involved essay answers are more condusive to applying concepts that are not mathematical (per se) in nature.

Ken
March 8th 2007, 08:24 PM
Do you mean underwriting guidelines or do you mean trending and calculation of loss layers?

ocac07
March 12th 2007, 02:49 PM
Do you mean underwriting guidelines or do you mean trending and calculation of loss layers?



Both. Is the latter one related to loss triangle? Does the loss triangle affect pricing or it's only related to predicted losses? How does the company decide the premium rate system? Thanks.

Ken
March 12th 2007, 10:42 PM
Loss triangles affect pricing and predicted losses. I'm not really sure how you could change predicted losses without having an impact in price.

ocac07
March 14th 2007, 03:32 PM
I am confused. I saw from one model that multiplying the loss ratio (from loss triangle and previous years’ premium) by the current year’s premium to get the predicted loss. I couldn’t find where the current year’s premium comes from.

Irish Blues
March 14th 2007, 10:11 PM
From a data pull on premium, more than likely.

The question was, "what factors affect pricing in auto products." On the surface: there's expected losses and past claims history, plus type of vehicle driven and where the vehicle is garaged. OK, simple enough - all of those affect pricing ... but after that, ? In what state(s)? Factors that can be considered in one state may be barred from use in another ... and I'd assume you knew that things like experience losses and claims history are part of auto pricing, and so you're interested in what other factors might come into play. Before anyone can give a better answer, you need to decide exactly what it is you want to know - otherwise, it's like asking, "Can someone tell me some things that are round?" and expecting to get a list of things you'd see in a classroom but instead getting a list of things found in a museum in Rome.

Example: In Massachusetts, insurance companies don't set rates - the state does, and there's only a handful of things that can be considered in setting rates. Experience losses for the state as a whole and type of vehicle are two things, claims history and garage location play a lesser role and then things like age, sex, and marital status play little if any role. (Of course, if you're 65 or older in MA, you automatically get a 25% discount even though the state readily admits there's no justification for the discount and the data shows that those people shouldn't get it ... but since it's there, it's going to stay there.) That's just on the surface - there's the problems with the involuntary pool, how drivers in that pool are distributed, and so forth and so on. And that's just what I know from living in MA and not working in personal markets.

So ... refocus your question, and someone here will try to take a shot at answering it.

ocac07
March 15th 2007, 01:59 PM
Irish Blues, thanks for the limpid description. From your second paragraph “ Example: In Massachusetts, insurance companies don't set rates - the state does, and there's only a handful of things that can be considered in setting rates….” Does it mean every insurance company charges almost the same premium for each insured company. How do we adjust the rate by a factor so that the premium can be more conservative or competitive? Can you guide me some resource related to this topic and where I can find states’ rates for those states set their own rates? Thanks.

Irish Blues
March 15th 2007, 03:10 PM
Yes - in MA, the base rates (as well as adjustments for deductibles and additional coverages) are set by the state, and that's what every company licensed in the state has to charge. Companies can offer discounts (as approved or ordered by the state), but for the average risk the rate he/she is going to pay is going to be the same regardless of who the insurance provider is.

AFA adjusting rates in MA to be more conservative/competitive: you can't. Period. The state sets the rate, and except for the allowable adjustments that's the rate policyholders pay. If you're paying $1500 for insurance thorugh one company, you're very likely going to pay $1500 with everyone else.

For more information: http://www.mass.gov/?pageID=ocasubtopic&L=4&L0=Home&L1=Consumer&L2=Insurance&L3=Automobile+Insurance&sid=Eoca

For the record: Massachusetts is the only state where the DOI sets auto insurance rates; it also explains why there are only 18 or 19 insurers left here.

Ken
March 15th 2007, 06:17 PM
The problem isn't in the DOI setting rates. The problem is their rates are so inadequate. If my memory serves me correctly, their residual market pool is large because you can either accept a risk or cede them to the pool. At inadequate rates, you have to cede many risks. The way the residual market mechanism is set up, the losses have been unevenly spread among companies. A select few companies have historically been paying much less than their fair share of the residual market burden and causes companies to flee from the state.

Anyways... Some fun underwriting criteria that some people claim is a proxy for race (which you cannot use.) Credit scoring, territory rating, income, and education.

Irish Blues
March 16th 2007, 08:34 AM
If a driver's rating is below a certain number, the insurance company can cede the driver to the pool; in the mid-90s, over half the state was in the residual market. The way the residual market is allocated isn't simple at all - while in theory the risks are allocated based on market share, companies can get credits/debits to how much of that market they have to take based on all kinds of stuff. Companies don't compete for drivers - they compete for insurance agents who sell insurance to drivers in the residual market. It ends up that the company with the largest market share (30%) only has like 7% of the residual market share. (They also only sell auto insurance in MA, so the current system as is allows them to survive - in competition, it's debateable whether they'd make it ... but that's another discussion altogether.)

The rates are wholly inadequate - when compared to what rates would be in a free-market, competitive system like you see in nearly every other state. Under a competitive system, I should be paying about $600-700 less per year and should be able to get better coverage than 20/40 (the standard set by the state - to even get to 100/300 would be another $300-400 a year).

The last time MA had a system where insurers set the rates was around 1977. It lasted less than 45 days before the state took over setting rates again, and there's a huge fight over whether we'll ever see insurance companies get to set rates themselves.