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From PricingWiki

This part of the wiki describes the main methods in use for the pricing of personal lines. The focus is on methods used to determine the technical price (expected cost of claims plus expense and capital loads etc) rather than methods which can be used to determine commercial prices.

There are certain characteristics of personal lines business that result in the techniques appropriate for personal lines pricing being rather different from those appropriate for London Market and commercial business. Such characteristics include:

• there are generally large volumes of data, and data is reasonably readily available
• coverages are fairly homogeneous
• segmentation (or differentiating between risks) is vitally important for most lines of business
• the relationship with a customer is very important for some insurers, allowing for profit margins on future business and with other products held by the customer
• there is more certainty within the risks compared to (say) London Market business.

A lot of focus is placed on deriving appropriate relativities by rating factor within personal lines pricing. Given the degree of segmentation within insurers' rates, this is vitally important from the perspective of avoiding anti-selection by competitors. A lot of emphasis is placed on analysing data better, finding new "interactions" within the data, and finding new rating factors that help differentiate risks in a better manner.

The areas covered include:

• generalised linear models, which are the main tool used for determining relative claims experience
• other relativity methods
• classification techniques, used for classifying things like postcodes into rating areas
• expense modelling
• technical base rates, used for determining overall rate levels
• implementation of rates, including comparing technical rates with rate books and with competitor rates
• lifetime customer value models, which look at the value of a customer over their complete lifetime and product range
• a brief section on classes of business with additional characteristics that need to be considered
• a section on issues that actuaries in other countries may have to pay more attention to because of market or regulatory conditions.

All references to papers quoted are detailed in the references section.