Sustainable Pricing Strategies for Group Risk Business · 2015-05-17 · Sustainable Pricing...
Transcript of Sustainable Pricing Strategies for Group Risk Business · 2015-05-17 · Sustainable Pricing...
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Sustainable Pricing Strategies for
Group Risk Business
Jenny Gibson & Danny Shuttleworth
© 2015 AIA Australia Ltd
This presentation has been prepared for the Actuaries Institute 2015
Actuaries Summit.
The Institute Council wishes it to be understood that opinions put forward
herein are not necessarily those of the Institute and the Council is not
responsible for those opinions.
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Out of scope Product terms
Member awareness
Lawyer activity
Data quality
Pricing resources
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Agenda
Insurance Cycles
How to Manage Insurance Cycles
Behavioural Economics
How to Manage Behavioural Biases
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The Insurance Cycle An insurance cycle is the tendency for premium rates, profits and capacity to rise and fall in a cyclical nature over time
Hard Hard Hard
Soft Soft Soft
Time
Pric
e/P
rofita
bili
ty
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HARD
Increased Profitability
Increased Capacity
Increased Competition
Reduced Prices Weaker Terms
Reducing Capacity
Reducing Competition
Increased Prices Tighter Terms
SOFT
HARDENING SOFTENING
Reduced Profitability
The Insurance
Cycle
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Source: APRA Quarterly Life Insurance Performance, Jun 2008 to Dec 2014
APRA Insights Bulletins 1998-2008
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Jun
-98
Jun
-99
Jun
-00
Jun
-01
Jun
-02
Jun
-03
Jun
-04
Jun
-05
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
RO
E
Return on Equity
Investment
linked
Non-
investment
linked
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Source: APRA Quarterly Life Insurance Performance, Jun 2008 to Dec 2014 -25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Ju
n-0
8
De
c-0
8
Ju
n-0
9
De
c-0
9
Ju
n-1
0
De
c-1
0
Ju
n-1
1
De
c-1
1
Ju
n-1
2
De
c-1
2
Jun
-13
De
c-1
3
Ju
n-1
4
De
c-1
4
Pro
fit
Ma
rgin
Profit margin - Group Lump Sum
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Source: APRA Quarterly Life Insurance Performance, Jun 2008 to Dec 2014 -25%
-15%
-5%
5%
15%
25%
35%
Jun
-08
De
c-0
8
Jun
-09
De
c-0
9
Jun
-10
De
c-1
0
Jun
-11
De
c-1
1
Jun
-12
De
c-1
2
Jun
-13
De
c-1
3
Jun
-14
De
c-1
4
Pro
fit
Ma
rgin
Profit margin - Group Disability Income
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Factors that contribute to the Cycle
Accounting year basis
Market is inefficient
Information delays
Decision delays
Implementation delays
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Strategies to Manage Insurance Cycles
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Strategies to Manage
Insurance Cycles
Time
Pric
e/P
rofita
bili
ty
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Strategies to Manage
Insurance Cycles
Recognise where you are in the cycle
Sustainable product design
Don’t follow the herd
Maintain sound pricing discipline
Product and service differentiation
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Strategies to Manage
Insurance Cycles
Earlier recognition of emerging experience
Effective relationship management
Reward returns not volumes
Revise business plans and targets
ERM controls
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ERM Controls
Checklist of risks
Systematic risk assessment
Objective risk assessment
Is it within risk appetite?
Apply appropriate contingency
margins or discounts
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Market Behaviour
and Behavioural Economics
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Types of Behavioural
Biases
Group or herd behaviour
Loss Aversion / Prudence bias
Competitive reaction
Anchoring bias
Confirmation bias
Overconfidence bias
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Competitive Reaction
Fear of the loss of market share
Greed to gain more market share
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Anchoring Bias
Question
Is the population of Turkey
greater than 30 million?
Is the population of Turkey
greater than 100 million?
Answer: 77 million
48
million
107
million
AIA
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Anchoring Bias
Question
Is the number of doctors in
India greater than 200,000?
Is the number of doctors in
India greater than 1,000,000?
Answer: 840,000
500,000
2,590,000
AIA
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Anchoring Bias
Three types of anchoring
Anchoring to a past event or trend
Anchoring to another person’s
initial estimates
Status quo
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Lets Play a Game
2, 4, 6, …
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Confirmation Bias
The tendency to seek out evidence to
support a point of view and to dismiss
evidence that does not support it
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Over Confidence Bias
The tendency to be over
confident in our estimates
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Prudence Bias
The tendency to be overly
cautious in our estimates
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Strategies to Manage Behavioural Biases
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Strategies to Manage
Behavioural Biases
Anchoring Bias
Independent review of pricing
Try different starting points,
options, approaches and models
Don’t act as anchor to the people
around you
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Strategies to Manage
Behavioural Biases
Over Confident / Confirmation Bias
Have you considered all alternatives?
Build your own counter arguments
Get someone else to play “devil’s
advocate”
If asking advice of others, don’t ask
leading questions
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Strategies to Manage
Behavioural Biases
Prudence Bias
Best Estimates vs Conservative
Estimates
Be clear on what extra margins
are applied
Consider correlation of risks
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Strategies to Manage
Behavioural Biases
Some other points
Be aware!
Create processes and checklists
to overcome bias
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References Qin, J., Smee A. and Wallace C., 2005, “The Insurance Cycle and Market Behaviour”, Institute of Actuaries of
Australia, XVth General Insurance Seminar
Chidgey, K., Cohen, A., Priest, C. and Stephan, K, 2005, “An investigation into the Australian Insurance Cycle”,
Institute of Actuaries of Australia, XVth General Insurance Seminar
Feldblum, S.,2000, “Insurance Cycles and Business Strategies”, Institute of Actuaries/Faculty of Actuaries, GIRO
Insurance Convention
Lloyds of London, 2006, “Managing the Insurance Cycle”, Lloyds of London
Lang, J., 2014, “Life Insurance in Australia – Profits falling”, www.actuarialeye.com
Archer-Lock, P., Fisher, S., Hilder, I., Line, N., Shah, S., Wenzel, K. and White, M., 2003, “The Cycle Survival Kit”,
Institute of Actuaries/Faculty of Actuaries, GIRO Insurance Convention
Valenti, J., Edwards, B., Haggith, H., 2012, “The limitations of being human: A study of cognitive bias impacts
on actuarial decision making”, Actuaries Institute, 2012 General Insurance Seminar
Taylor, N., 2000, “Making actuaries less human - lessons from behavioural finance”, Staple Inn Actuarial Society
Kahneman, D., Lovallo, D., Sibony, O., 2011, “The Bid Idea: Before You Make That Big Decision…”, Harvard
Business Review
Hammond, J., Keeney, R., Raiffa, H., 2006, “The Hidden Traps in Decision Making”, Harvard Business Review
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Disclaimer
The content is current as at the date set out on the cover page of this presentation and may be subject to change.
This presentation provides general information only, without taking into account the objectives, financial situation, needs or
personal circumstances of any individual. This presentation may contain projections concerning financial information and
statements concerning future economic performance and events, plans and objectives relating to management, operations,
products and services, and assumptions underlying these projections and statements. It is possible that actual results and financial
conditions may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and
statements.