Personal Lines Pricing

By David Zornek, Candidate Representative, and Katrina Redelsheimer, FCAS, Candidate Liaison Committee

This is the sixth in a series of “This Actuarial Life” articles illustrating the day-to-day life of the actuary in different fields.

In our prior edition of This Actuarial Life, we began a discussion of one of the most common jobs for actuaries: pricing at insurance companies. We focused on commercial lines, where volatile data and heterogeneous exposures are the norm. This issue, we illuminate the very different world of personal lines pricing, where regulation and business strategy dominate.

Personal lines encompass policies sold to private individuals to insure personal (i.e., non-business) property and liability. Homeowners’ and auto insurance policies make up the majority of the personal lines market, with smaller markets covering motorcycles, boats, renter’s insurance, etc. Regardless of the coverage, exposures in personal lines are very homogeneous. From an insurance perspective, there isn’t much difference between one car and the next, or one home or another. This changes the actuary’s perspective from grappling with what the risk is, as in commercial lines, to fine-tuning pricing algorithms based on subtle differences.

To a large extent, personal lines insurers have a captive market. Liability auto coverage is compulsory in the United States, and you will be hard-pressed to find a lender willing to finance a home or automobile that’s uninsured. Consequently, the insurance market typically competes over who can provide the minimum required coverage at the best price, rather than the most comprehensive or creative coverage.

The compulsory nature of personal lines also drives greater regulatory involvement, particularly in pricing. Regulation frequently prevents insurers from using predictive rating variables or increasing rates if the impact on the consumer is judged to be harmful. Even in the competitive marketplace, there are strong business reasons for insurers to avoid making large rate changes: It’s quite easy for an insured to switch to another carrier. The actuary’s indicated rate change is therefore just one piece of a larger pricing puzzle.

With regulation and customer retention pulling prices down and profitability needs pushing them up, the actuary is constantly striving for a “pricing sweet spot,” where rate increases support profitability without driving away customers or running afoul of regulators. Finding the right middle ground requires significant input from sales agents, who have more direct customer knowledge, as well as coordination with underwriters.

Pricing teams are usually formed around regulatory bodies, which generally means by state. A pricing team needs to thoroughly understand not only the letter of the law in their state, but also the philosophies and personalities of the regulators there. Understanding and anticipating regulators’ needs is essential to reducing the cost of regulatory delay.

Figuring out how to adapt existing actuarial methodologies to satisfy regulators is one of the primary challenges the pricing actuary faces. For instance, when moving into a new state, you cannot merely implement what is done for other states. The actuary must find ways to unpack methods and assumptions that can allow them to be used within the new regulatory framework.

The actuary’s experience will vary widely depending on the particular regulatory environment. Some regulatory regimes leave little room for analytical creativity. The actuary may spend a great deal of time “playing politics” by presenting a standard analysis in a way that regulators will buy into. In any situation, communication skills will play a key role.

Insurance company actuarial life has a reputation for providing excellent work-life balance. Project timelines can generally be adjusted for study needs, especially at very large insurers. But deadlines and busy times of year still exist. Study programs vary. For those that offer study time, most actuarial students report little difficulty taking most or all of their allotted time. Overall, insurance company pricing actuaries usually find that it’s up to them how they want to manage their time.

Check the next issue of Future Fellows for more “This Actuarial Life!”