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Insurance pricing uses the Loss cost or exposure as the base mechanism. This is usually performed by actuaries as a point estimate to develop base rates and have follow up mechanisms to keep the rates updated as the cost of the risk transfer changes. Typically, the base premiums get adjusted to derive final premiums due to various internal and external factors. Price optimization is the process that describes the various techniques and factors that result in an amended premium.
The process of optimizing the base rates/initial premium involves two broad categories of adjustment covering the Individual policy level risks and competitive elements /customer behavior aspects.
This paper presents an approach to combine both underwriting and Market data models by using historical data along with a “What if” tool to assist Underwriters amend defined parameters to see the impact on premium. This approach also attempts to generalize the process across Lines of Business by identifying variables (both base and calculated) that can impact the premium optimization outcome.