2022 Sep Q1

[Hong Hong]

I'm going through the Examiners' Report and comparing it against my own answer to see where I missed the marks.

[Question] An insurance company has been selling motor policies exclusively through its website since inception. Recently, it has started selling some policies through motor dealerships. Suggest reasons why the pure risk premium calculated may be different for policies sold through this new distribution channel.

I gave 6 points (since it's 3-mark question) but only scored 1.5. Would like to know why some of my points are not included in the marking scheme.

My answer:
1. Different customer profiles attached by the channel eg new car buyers while the website have a mix of new car buyers and existing car owners.

2. Inertia pricing due to difference in price elasticity of the 2 channels

3. Customers’ Lifetime value differs between 2 channels based on propensity to renew

4. Extent of anti-selection may have been factored in the pure risk premium

5. The channel itself may be a rating factor based on the historical data observed

6. Different large loss loading, there may be higher accumulation risk with the dealers


I think point 1,2,5 scored and point 3,4,6 missed.

Appreciate if someone can help me understand why inertia pricing, customers' lifetime value and large loss loading are not considered as factors contributing to different risk premium between Dealership & Online channels.

Thank you in advance!

 

[Busy_Bee4422]

Good day

The question is asking about differences in pure risk premium. I can understand 1, 6 and 5 (assuming 5 refers to the website having more accurate pricing) affecting assessments of the riskiness of clients. The others not so much eg 2 and 3 are more about the final/total premium charged rather than the pure risk premium to meet the expected cost of claims. I am struggling with 4 because without further information it's not clear what the point is.

I hasten to add I don't know which points scored but my general take is that you have a new distribution channel that leads to a possible different target (geographical, socio-economic group etc) market which may have different risk characteristics (driving experience, value of vehicles, where car is driven etc) compared to the current insureds either as a result of different channel processes (underwriting, control of sales process etc), and genuine risk profile differences leading to different expected claims experiences and any related uncertainty.