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Exploring the Aging Phenomenon in Insurance Markets

Learn about the evolution of loss ratios in property-liability insurance policies and the impact of aging on underwriting practices and customer behavior. Dive into empirical research and new developments shaping the industry.

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Exploring the Aging Phenomenon in Insurance Markets

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  1. Update on the Aging PhenomenonSteve D’ArcySholom FeldblumAlma Cohen CAS Fall Meeting November 12, 2002 Boston, Massachusetts

  2. Definition A cohort of property-liability insurance policies, all written as new business at the same time, experiences a gradually improving loss ratio as the policies undergo successive renewal cycles with an insurer. This contrasts with the select-ultimate experience pattern of life insurance.

  3. Primary Empirical Research • Dahlby 1983 Adverse Selection and Statistical Discrimination Journal of Public Economics • D’Arcy and Doherty 1990 The Aging Phenomenon and Insurance Prices PCAS • D’Arcy and Doherty 1990 Adverse Selection, Private Information and Lowballing in Insurance Markets Journal of Business • Feldblum 1996 Personal Automobile Premiums: An Asset Share Pricing Approach for Property/Casualty Insurance PCAS • Cohen 2001 Asymmetric Information and Learning in the Automobile Insurance Market (Working Paper)

  4. Explanations for the Aging Phenomenon • Accumulation of private information • Business more accurately classified • Underwriting – high risk policies cancelled • However, aging occurs where renewal underwriting is restricted • High maintenance policyholders become dissatisfied with service and leave

  5. New Developments • Extensive dataset of company experience • Alma Cohen’s research • CLUE (Comprehensive Loss Underwriting Exchange) • Appears to lower initial loss ratios and reduce level of improvement • Aging Phenomenon in DFA models • Allows study of optimal growth rates

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