Moral hazard for 2-year product?
One of our existing clients for whom we work on quarterly reserving requested us to conduct a monitoring and product development exercise on their Motor portfolio.
We spent considerable time in the data extraction stage given that the format was not as required and the system did not contain a data field critical for pricing one of the new products, that the Company wished to develop. It took some time to explain to the client exactly what type of information was needed for that particular field and to convey that understanding to the IT team that was responsible for the extraction. We ended up using a field that was a close proxy to the required one.
One of the products that the client wishes to offer is a 2-year Motor policy where the premium rate for 2 years is determined and guaranteed at the inception of the policy. Hence, we needed to allow for the possibility that moral hazard may result in higher claims since the insureds have the assurance that their premium fixed for two years, when they buy the product.
We were tasked with pricing the Comprehensive and Third Party portfolio of a Saudi client along with writing the report and creating an actuarial pricing tool, within a short time frame, all of which was delivered in due time.
The main challenges we faced was a lack of exposure on the TPL book. Initially we used generalized linear modelling with 9 rating factors, but our results for TPL were inconsistent and volatile, and for that reason we relied on the rates previously recommended with a marginal increase. The Comprehensive book on the other hand had sufficient data and were able to fit 10 and 13 rating factors to the data for the commercial and retail groups respectively. The client was largely satisfied with the initial rates provided. After engaging in discussions with the client we agreed to adjust the relativities for the source of business and car usage after receiving convincing feedback from the underwriter.
We prepared the report and shared with the client, describing the whole process and our findings. Additionally, we updated their existing pricing tool, which the client uses to create quotations for corporate policies involving experience rating.
Ensuring the Accuracy & Clarity of Results
We worked on a statutory Motor pricing exercise for a UAE client with a sizeable Motor portfolio. Given the size of the Company, we expected that the data provided would be of a certain standard, however there were some issues faced, the most notable being the number of claims that did not link to policies. We had to make allowance for this data shortcoming in the pricing work.
As the Company was not familiar with Actuarial practice for pricing, we had to explain the Actuarial terminology, methodology and results to the Company’s management, for them to be able to fully comprehend and use the results. The Company is not yet required to use actuarial pricing, and so they have the luxury of time to consider the pricing structure we designed.
One of the regulatory requirements for all insurers writing Motor business in the Kingdom of Saudi Arabia is to have an actuary price all of their Motor products and submit a report to the regulator, SAMA.
We worked closely the client’s underwriting team to ensure that the pricing structure we were creating matched their risk appetite, and that these prices would both make them competitive and profitable. By exploring the data sharing dashboards with the clients, we were able to identify profitable niches in the market which the Company could target to increase profitability. The biggest challenge was to agree on how to price female drivers entering the market for the first time. We had several discussions and explored benchmarks across the region before reaching our conclusion and pricing structure.
Pricing is a collaborative exercise, since pure technical and actuarial pricing may miss nuance that underwriters may be familiar with.
The Bahrain Insurance Association (BIA) asked us (2015) to perform a review of the compulsory Third Party Liability tariff structure. This tariff structure has been set in place since 1995.
We recommended to the BIA that we review Comprehensive at the same time. This recommendation was accepted and we collected and processed the data for 13 companies – equating to more than 80% of the Bahraini market.