Carrier Management recently published an article in three parts by James Lynch, chief actuary and vice president of Research and Information Services at the Insurance Information Institute, based largely on an actuarial paper authored by Irene Bass, a former Casualty Actuarial Society president and a former member of the American Academy of Actuaries’ board of directors.
Executive SummaryOpinion: Two actuaries—Irene Bass, a former Casualty Actuarial Society president, and James Lynch, chief actuary for the Insurance Information Institute—recently analyzed a rating process used by Allstate, rejecting the idea advanced by consumer advocates that it is an actuarially unsound and unfairly discriminatory example of price optimization. Here, consumer advocate and actuary J. Robert Hunter, director of Insurance for the Consumer Federation of America and a former insurance commissioner, reacts to Lynch's analysis published in Carrier Management and Bass's analysis performed on behalf of Allstate, first noting their lack of independence and then attacking their main arguments about the "premium reversal" problem that they say Allstate solves with "Complementary Group Rating." According to Hunter, the rare problem would not exist at all if companies didn't cap rate increases. He also says the two actuaries supporting Allstate's model start with a faulty premise that filed actuarial statewide rate indications are accurate. Calling CGR "a new and monumentally more complex script for the theatrics of ratemaking," Hunter concludes that CGR "adjustment factors" designed to optimize retention are not risk-based and result in unfairly discriminatory rates. Back in 2013, Hunter wrote one of the first articles Carrier Management published about the use of price optimization in insurance rating, "Price Optimization: A Dangerous Method." In today's article, he reacts to these analyses:
- "Complementary Group Rating – A Report on Behalf of Allstate Insurance Company," by Irene K. Bass, dated March 2, 2016.
- "Not All 'Optimization' Is Price Optimization; Allstate's CGR Proves It," published by Carrier Management.
The Bass paper, which asserts that Allstate’s new “Complementary Group Rating” (CGR) plan “does not possess key characteristics often associated with price optimization,” was written, according to its title page, “on behalf of Allstate Insurance Company.” Similarly, “Lynch was asked by Allstate officials to review and write about the plan,” the Carrier Management article introduction states. Both authors worked closely with Allstate in preparing their work and relied on Allstate for information in that process. These works, which cannot be viewed as independent analyses of Allstate’s rating methods, are reviewed below.
Bass says that CGR’s purpose is to:Cap large rate increases. Prevent “premium reversals,” defined as an individual’s final rate going down when the actuarial indication was upward (and vice versa).
Anyone who studies insurance ratemaking knows that a massive, expensive computer program like CGR is not needed to cap rate increases. That can be done independently of CGR and has been done that way for decades.
There are serious questions about capping. Capping necessarily moves the price away from the actuarial indication, and, of course, without capping there could be no premium reversals. Capping only makes actuarial sense if it is done as part of a transition program to ease the impact of a large rate increase. Rate decreases, on the other hand, should never be capped, as consumers find no difficulty in absorbing a fully realized, actuarially indicated rate reduction. If a rate decrease is thought to be too large, then better methods of applying credibility to the data, such as using a longer period of data or data from other sources, should be found and capping avoided.
Aside from offering a new technique for capping, Bass suggests that CGR provides an important advance in the age-old battle against “premium reversals.” Except there is no such battle, and premium reversal hardly qualifies as an important actuarial conundrum. You can type just about anything into the Google search engine and get 27,000 results. But if you search “‘auto insurance’ ‘premium reversals,'” Google is baffled, returning under 10 results. A search on the Casualty Actuarial Society website, where the tough and interesting actuarial questions are sure to be discussed, finds only one article that mentions it, an April 29, 2016 PowerPoint presentation co-authored by Bass that merely recaps the Bass paper discussed here.
The “premium reversal” problem has been invented as part of Allstate’s defense of the serious problems with CGR. Reversals may occur but, as Lynch acknowledges, “[t]hey are rare.” Even these rare reversals would be entirely extinct if insurers did not tamper with the actuarial indications; they only occur when the insurer decides to stray from the cost-based rate.
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