Actuarial pricing, capital modelling and reserving

Pricing Squad

Issue 7 -- October 2016

Welcome back to Pricing Squad

Pricing Squad is a newsletter for fellow pricing practitioners and actuaries in general insurance. Enjoy, and let me know your comments and ideas for future issues.

In today's issue, you can learn useful ways to quantify winner's curse in your book and improve your product accordingly.

Life after Winner's Curse

If you attended Mark Rothwell's recent Staple Inn gig on the cognitive tricks our minds play, you would have been reminded about the dreaded Winner's Curse. This is when your company mostly binds the business whose risk you most underestimate.


As Mark said, the first step to solve this embarrassing problem is to be aware of it.

The second step could be for example to apply the game theoretic price correction from the Winner's Curse Working Party 2009 Report. It looks like this:

If this solution is a no-no for your next pricing committee, here is what I tried instead.



  • A list of 1000+ market quotes
  • Your own own quote next to each market quote
  • Intermediate Excel & VBA skills

The chart below shows the average premium quoted by My Company (telematics private motor) and by the market in rural areas, towns and cities.

My Company's average prices are within 3% of the market price in every segment. On this basis alone, My Company's alignment to the market is strong, a good anti-Winner's-Curse strategy.

But once we zoom in on the distribution of price differences between My Company and the market in each segment, a very different picture emerges.

Clearly, our rates are more aligned with the market in rural areas and less aligned in the cities. Therefore, we must be experiencing increased Winner's Curse in the cities!

(With a little Excel magic, the same analysis can be done multivariately, isolating each factor's contribution to Winner's Curse.)

Not surprisingly, the market overall does perform better in rural areas and more poorly in cities.

Why? Because cities are less homogenous than rural areas. There are more granular postcodes, more occupations and more diversity in cities than in rural Britain. Therefore, pricing differs significantly between insurers in urban areas. And this feeds Winner's Curse.

Once you have identified the segments responsible for your own brand of Winner's Curse, you can start solving the problem.


What can be done about this?

One solution is an in-depth rate and UW-criteria review focusing on urban areas. This review should aim to increase My Company's alignment with the market. It can be achieved by reverse-engineering postcode segmentation and pricing interactions, and identifying new rating factors used by competitors in cities.

If My Company was using price matching, they could also start offering it in cities only.

Another approach is to reduce exposure in cities altogether and target rural customers instead.

How can we support you?

If you need access to pricing tools to radically simplify your work and deliver reduced loss ratio quickly, or if you are simply looking for an actuarial contractor, please be in touch.

Thank you for reading, and have a great day,
Jan Iwanik, FIA PhD

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