Actuarial Notes

Price Optimization White Paper

By NAIC Casualty Actuarial and Statistical (C) Task Force · National Association of Insurance Commissioners · 2015

Study guides: Exam 6U, Exam GI-201

A white paper of the NAIC's Casualty Actuarial and Statistical (C) Task Force, dated November 19, 2015, that provides background research on price optimization. It identifies potential benefits and drawbacks of the practice and presents options for state regulatory responses to its use in ratemaking, with a primary focus on personal lines.

On the syllabus

  • Exam 6U — objective A5; pp. 1-16 (the Task Force's white paper, November 2015, as the content outline states it)
  • Exam GI-201 — outcome 2g; pp. 6-16 (paragraphs 15-49)

I Scope

  • The paper gives background research on price optimization, identifies its potential benefits and drawbacks and presents options for state regulatory responses; the Task Force expresses no opinion on the policy decisions states have made or may make.
  • The primary focus is personal lines ratemaking; risk selection, marketing and other insurer operations are not addressed.

II Introduction

III Background: State Rating Law, Actuarial Principles and Definitions

IV Price Optimization Background

V Identify Potential Benefits and Drawbacks of Price Optimization

VI Regulatory Responses to Price Optimized Rating Schemes

VII Recommendations for Regulators

  • Rating plans should be derived from sound actuarial analysis and be cost-based.
  • Two insurance customers with the same risk profile should be charged the same premium for the same coverage, allowing for temporary deviations from capping or premium transition rules.
  • A selected rate between the currently approved rate and the actuarially indicated rate should be allowed if based on reasonable considerations that follow state law and actuarial principles and standards; a rate outside that range may be acceptable if disclosed and shown to be consistent with them.
  • Rating practices that adjust indicated rates or premiums and cannot be shown to be cost-based, or to comply with state rating law, should not be allowed under the requirement that rates not be unfairly discriminatory; the Task Force names price elasticity of demand, propensity to shop for insurance, retention adjustment at an individual level and a policyholder's propensity to ask questions or file complaints as inconsistent with that requirement.
  • Rating classes should not be so granular that they have little actuarial or statistical reliability.

VIII State Considerations

  • Consider issuing a bulletin on insurers' use of methods that may result in non-cost based rates (Appendix B).
  • Consider enhancing requirements for personal lines rate filings to improve disclosure and transparency (Appendix C).
  • Analyze models used by insurers in ratemaking, using a list of possible questions (Appendix D).

Appendix A State Actions Taken Prior to Adoption of the White Paper

Appendix B Potential State Bulletin

Appendix C Potential Requirements for Rate Filings

Appendix D Potential Questions for Regulators to Ask Regarding the Use of Models in P/C Rate Filings

Sources