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Retention Modeling

Retention Modeling. 2003 CAS Ratemaking Seminar March 27-28, 2003 Robert J. Walling, FCAS, MAAA. Objectives. Why do it? What characteristics matter? How do you model it? What applications are there?. Why Do Retention Modeling?.

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Retention Modeling

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  1. Retention Modeling 2003 CAS Ratemaking Seminar March 27-28, 2003 Robert J. Walling, FCAS, MAAA

  2. Objectives • Why do it? • What characteristics matter? • How do you model it? • What applications are there?

  3. Why Do Retention Modeling? • Incomplete picture of your customers and prospective customers • Incomplete picture of pricing impacts on policy retention and premium • Underspecified pricing and financial models

  4. Rate Impacts: The Current Problem • What’s the impact of a +25% rate change? • Current Loss Ratio = Loss/Premium • Proposed Loss Ratio = Loss/(Premium*1.25) • = Loss/Premium*(1/1.25) • = Loss/Premium*80% • = 80% of Curr. Loss Ratio • The only answer is -20% on the Loss Ratio!

  5. The Absurdity (If a little is good…) • What’s the impact of a 200% rate increase? • Ignoring inflation momentarily. • If Current Loss Ratio = Loss/Premium • Proposed Loss Ratio = Loss/(Premium*3) • = Loss/Premium*(1/3) • = Loss/Premium*33.3% • = 33% of Curr. Loss Ratio

  6. More Absurdity (What Cycle?) • In 1999, PA Med Mal loss costs decreased 13.3% Do you think the market would respond the same way to a 25% increase today as in 1999?

  7. Problem with the Current Pricing Analysis World • No change in response expected from policyholders: • Likelihood of Renewal • Satisfaction of Policyholder • Book Churning/Adverse Selection • Mix of Business Shift • Consideration of Marketing/Underwriting • Satisfaction of Agent • Competition

  8. Why Hasn’t Retention Modeling Been Done? • Sensitive to many factors • Tough parameterization issues • New business penalty poorly understood • Not the “Coolest” area of research

  9. Renewal Behavior Characteristics • Renewal Pricing Change (% or $) • Competitive Position • Customer Rating Characteristics • Market Conditions (Inflation, U/W Cycle, etc.)

  10. 100% R = f(P) Demand Curve 0% Price (P) The Flexible Shape of the Retention Demand Curve Renewal Rate (R)

  11. Renewal Behavior Rating Factor Characteristics • Traditional Rating Factors • Class - Multiple Line • Territory - Limit • Limit - Account Size • Industry Group • Financial Underwriting Score (Credit, D&B) • Claims/MVR/Underwriting History • Age of Youngest Additional Driver • Satisfaction with Agent/Service • Number of Years Insured • Distribution Channel

  12. Retention Modeling Database

  13. Multivariate Analysis Determines Renewal Probability

  14. Reviewing Renewal Differences

  15. Changing Market Conditions • Market conditions change over time in the historical data • Historical market conditions are not necessarily predictive of future market dynamics How do you reflect future market conditions in a retention model?

  16. Retention Modeling Database – Market Scenario Testing

  17. Renewal Probability – Market Scenario Testing

  18. Modeling Retention – Market Differences

  19. What Applications Are There? • Retention by class segment • Improved premium/policy/loss ratio impacts of rate changes • Lifetime Customer Value • Optimal Rate Changes/ Effective Rate Impact

  20. Risk Premium Model Expenses Renewal Model PRICE Optimisation Algorithm Most Loyal Most Profitable MOST VALUABLE Optimal Pricing Strategy

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