Monitoring experience is a vital stage in Actuarial Control Cycle. Experience study allows insurance company to test the assumptions against actual experience to decide if current assumptions are reliable. With prudent analysis, company can further make proper adjustments to assumptions that go into pricing model to refine premium rates and improve profitability, or reserving model to lower insurance risks and financial risks. After first year experience data of Attaboy Basic being validated and cleaned, it manifests some deviation against the assumption and factors in current rating manual:
The experience base PMPM is $2.13 higher than the assumption in current rating manual, indicating that rating manual should adopt a higher baes PMPM. Scenario testing should be performed to determine the new rate since, according to sensitivity analysis, base PMPM is the most critical assumption to product’s profitability. Thus, any changes should be align with Attaboy’s risk appetite and business plan.
Current rating manual adopts the lowest factor for age 1 and the highest factors for age 8 and 9+. According to experience data, factor for age 1 should be increased by 0.055 due to higher than expected claims. Although age 8 factor is 0.026 lower than current rating factor, it is not recommended to adjust the factor without comparing with competitors’ rates.
Large deviation also exists for age 4 and 5 between factors in current manual and experience data. It is recommended to increase age 4 factor by 0.048 while decrease age 5 factor by 0.052 for a more reliable factor.
Current rating factor for age 6 is lower than actual experience by 0.026. However, it is not recommended to increase the factor due to the low distribution in first year, as a higher factor may lose more potential customers. Further discussion with underwriting and marketing team is suggested to better understand the potential impact.
Huge deviation exists between actual and expected rating factor for type “NonPurebred”. A lower factor by 0.47 is recommended as it may also bring up the distribution.
Factor for “Hound” should increase by 0.22 due to higher than expected claims to decrease future insurance risks.