CAS Exam 8 Fall 2012, Question 4
Study guide: Exam 8
An actuary has historical information relating to customer retention. A logistic model was used to estimate the probability of renewal for a given customer. The two variables determined to be significant were the size of rate change and number of phone calls the insured made to the company. The parameter estimates were determined to be as follows:
| Rate Change | Parameter Estimate |
|---|---|
| Decrease to 3.9% increase | 0.3323 |
| 4.0% to 6.9% increase | 0 |
| Increase of 7.0% or more | -0.4172 |
| Number of Phone Calls in Past Year | Parameter Estimate |
|---|---|
| 0 | 0 |
| 1 | -0.2128 |
| 2+ | -0.4239 |
| Intercept Term | 1.793 |
|---|
Part a (0.75 points)
Calculate the renewal probability for a customer who has a 7% rate increase and called the company twice in the past year.
Part b (1 point)
The company needs policyholder retention to be above 78% to maintain growth and expense ratio goals. A possible strategy is to add the number of phone calls to the classification plan and use the model results to determine the rate increase.
Construct an argument either in favor of or against the strategy above, describing two reasons for that position.
Answer this question and see the worked solution