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Pen and graph Building Pricing Models

Solid underwriting and accurate pricing models are the backbone of insurance profitability. At Gross Consulting, we can assist your company in building or enhancing its current pricing tools.

 

Actuarial pricing involves more than estimating loss costs. At its best, it estimates the financial impact every component of the insurance contract. These components are dealt with to varying degrees of rigor throughout the industry, and some provide a real opportunity to outperform your peers.

 

The pricing task includes, but may not be limited to the following:

 

  • Estimating loss costs for an individual risk at the basic layer
  • Selecting loss costs for excess layers
  • Choosing/validating size of loss distributions
  • Employing proper fixed expense provisions
  • Choosing a risk load methodology

Each of these, if done poorly, could render an offering unprofitable or perhaps wildly uncompetitive. Care must be taken to accurately assess each piece and its relationship to the total.

 

It is also important to recognize and properly price “nonstandard” policy provisions, for example, an annual aggregate deductible (AAD). Relying on rules of thumb or traditional multiples could turn a seemingly innocuous AAD into an incredibly unprofitable provision. It is critical that your models be robust enough to price such items either directly or with stochastic simulation.

 

Actuarial pricing, in general, is pushing past historical norms and beginning to utilize available information and technology more fully. Areas such as predictive modeling have gained significant ground in recent years, and is an area where Gross Consulting can add value.

 

Many companies rely solely on the rates or loss costs promulgated by the rating bureaus. This is a very acceptable strategy, especially if a company has no actuaries at its disposal. However, the strategy could fall short in valuing the unique features and characteristics of a specific book of business. If there are differences within the organization (stricter underwriting, for example), relative to an “average” company, these could be opportunities in the marketplace using company-specific pricing models. Outsourcing the development of these models can be an extremely effective and cost-efficient way of taking that step.

 

Even companies that have actuarial talent often find themselves with capacity issues. Because their actuaries are consumed with day-to-day responsibilities, and thus cannot devote the necessary time to enhancing their pricing tools in response to and recognition of the changing environment.

 

For more information, please contact us.