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The Price Is Right (A.K.A. Optimal Pricing)

The Price Is Right (A.K.A. Optimal Pricing). Chet Szczepanski Chief Actuary Pennsylvania Insurance Department. The Price Is Right (A.K.A. Optimal Pricing). An Actuarial Perspective!. The Price Is Right (A.K.A. Optimal Pricing). CAS: Principles Regarding P&C Ratemaking

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The Price Is Right (A.K.A. Optimal Pricing)

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  1. The Price Is Right(A.K.A. Optimal Pricing) Chet Szczepanski Chief Actuary Pennsylvania Insurance Department

  2. The Price Is Right(A.K.A. Optimal Pricing) An Actuarial Perspective!

  3. The Price Is Right(A.K.A. Optimal Pricing) CAS: Principles Regarding P&C Ratemaking • A rate is an estimate of the expected value of future costs. • A rate provides for all costs associated with the transfer of risk. • A rate provides for the costs associated with an individual transfer of risk.

  4. The Price Is Right(A.K.A. Optimal Pricing), cont’d. • A rate is reasonable and not excessive, inadequate or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual transfer of risk.

  5. The Price Is Right(A.K.A. Optimal Pricing) The beginning of conflicting views?

  6. The Price Is Right(A.K.A. Optimal Pricing) AAA: Risk Classification Statement of Principles Three Primary Purposes: • Protect program’s financial soundness • Economic incentive • Enhance fairness

  7. The Price Is Right(A.K.A. Optimal Pricing) • Who decides what is fair? • Who establishes criteria to guage fairness?

  8. The Price Is Right(A.K.A. Optimal Pricing) More conflicting views?

  9. The Price Is Right(A.K.A. Optimal Pricing) AAA: Risk Classification Statement of Principles Design considerations: • Underwriting • Marketing • Program design • Statistical considerations • Operational considerations • Hazard reduction incentive • Public acceptability • Causality • Controllability

  10. The Price Is Right(A.K.A. Optimal Pricing) A Regulatory Perspective!

  11. The Price Is Right(A.K.A. Optimal Pricing) What the law says! Rates shall be neither: • Excessive, • Inadequate, • Unfairly Discriminatory.

  12. The Price Is Right(A.K.A. Optimal Pricing) • The law tells us what rates can not be. • The law does not tell us what rates should be. • The law does not tell us how to determine rates.

  13. The Price Is Right(A.K.A. Optimal Pricing) The law gives the Commissioner considerable discretion!

  14. The Price Is Right(A.K.A. Optimal Pricing) In Pennsylvania, we rely on competition and competitive markets as much as possible.

  15. The Price Is Right(A.K.A. Optimal Pricing) Competitive markets require, among other things: • Many buyers and sellers • Freedom of entry and exit for both buyers and sellers • No one buyer or seller sufficiently large to affect the price

  16. The Price Is Right(A.K.A. Optimal Pricing) • The government HAS interfered in the personal auto market! • The government mandates coverage, barring exit from the market for consumers.

  17. The Price Is Right(A.K.A. Optimal Pricing) The government often adds problematic constraints: • Limited Tort • Mandatory discounts for specific devices • Limits on merit rating charges

  18. The Price Is Right(A.K.A. Optimal Pricing) Consequently, the government will serve its constituency by investigating such innovations and regulating their application!

  19. The Price Is Right(A.K.A. Optimal Pricing) • Where do we go from here? • What can we conclude?

  20. The Price Is Right(A.K.A. Optimal Pricing) Conclusions: • Innovation is necessary for a healthy market • The government issues mandates as a result of public consensus • There exists a tension between the government and innovators in mandated markets!

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