The determination of optimal prices for insurance products

The determination of optimal prices for insurance products

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Speaker: Holger Theismann

Usually in non-life insurance prices are determined by explicit formulas. The unit costs for claims or administration and the proportional costs like commissions for agents are considered in these formulas. In case steering of products or portfolios is done by using combined ratios a profit margin is also included. Unfortunately, there is no indication how many insurance contracts can be made given the resulting prices. Furthermore, it is not obvious how business objectives are supported by this way of pricing.

First of all, the relationship between commercial prices and the quantity of sales has to be analysed and taken into account in order to be able to optimise pricing. Then the target function must be set in the light of corporate strategy. Mostly this function will comprise total profit and/or total premium income.

After repeating the classical pricing formula for non-life insurance, the first part of the presentation introduces a simple, generic model. This leads immediately to an enhancement of the classic pricing formula and to some interesting theoretical insights. The second part deals with refinements which are necessary for practical application. Finally, a use case will be discussed and the roles of different departments of an insurance company making the price optimisation successful.

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