Coverage Options
Ultimately, using a GLM to model deductibles etc. may result in a good model for existing policyholders but a poor one for future business. In particular, moving away from pricing by pure premiums for variables such as deductibles, will likely shift the insured's behaviour, causing historical experience to not reflect future expectations.
Hi. Can you dumb this down for me? I'm having trouble understanding what's meant. Maybe a simple example? Thanks.
Comments
Let's take the example of a Collision deductible. Suppose you offer $500, $1,000 and $2,000 options for the deductible. Logically, as you increase the insured's deductible they should pay less as we assume the expected loss is unchanged so the insurer is on the hook for less as the deductible increases -> lower premium for the insured.
But suppose your underwriters have been requiring risky business to carry a $2,000 deductible. Then the GLM might fit deductible relativities which are flatter or even indicate a surcharge for the $2,000 deductible because the risky business incurs more losses. Now, good risks who may want to carry a high deductible because they're affluent and risk-adverse are likely to look elsewhere to find a lower premium. So the book of business shifts more towards risky business and the historical experience is not reflective of the future.
"For instance, it may indicate that a higher deductible should be charged more than a lower deductible...Possible reasons for this model behaviour include:
...An underwriter may have recognized the policy as being a higher risk and required it to be written at a higher deductible."
Does the above comments (9/23) apply to the above excerpt as well? Despite the high ded, since the insurer is dealing w a high risk, so the prem charged is still relatively higher than similar risk w the same ded. Therefore, if applied to GLM, the variable will cause it to produce counterintuitive result of higher ded is charged more, is this the correct elaboration?
Yes, the above comments from September 2023 apply to the excerpt above.
In general, regardless of your mix of business, it's counterintuitive that you could lower your deductible and be charged a lower premium as well. The insurer is taking on more risk so should be compensated further. This does assume that every deductible is offered to every risk which, in the scenario mentioned appears to not be true because the underwriter is not allowing risky policies to have lower deductibles.
If we could capture a variable along the lines of "deductibles allowed by the underwriter for the risk" and included that in the GLM then it's possible the GLM would no longer produce the counterintuitive result.