A large, well-established home insurance company writes insurance policies to co

Question

A large, well-established home insurance company writes insurance policies to cover losses from fire, theft, and vandalism. In a recent financial review, managers discovered that company performance was lagging behind projections. They examined pricing and claims history in more detail and identified a group of about 10,000 customers whose claims far exceeded the collected premiums. Members of the actuarial group, whose compensation was partially tied to profitability of the policies they priced, were particularly frustrated. How would you recommend the insurer address this problem? Before continuing, first answer the following 3 questions to diagnose and solve the problem. Then, please elaborate in your answer to the question above. 1) Who is making the bad decision? 2) Do the actuaries have enough information to make a good decision? 3) Do the actuaries have the incentive to make a good decision? A large, well-established home insurance company writes insurance policies to cover losses from fire, theft, and vandalism. In a recent financial review, managers discovered that company performance was lagging behind projections. They examined pricing and claims history in more detail and identified a group of about 10,000 customers whose claims far exceeded the collected premiums. Members of the actuarial group, whose compensation was partially tied to profitability of the policies they priced, were particularly frustrated. How would you recommend the insurer address this problem? Before continuing, first answer the following 3 questions to diagnose and solve the problem. Then, please elaborate in your answer to the question above. 1) Who is making the bad decision? 2) Do the actuaries have enough information to make a good decision? 3) Do the actuaries have the incentive to make a good decision? A large, well-established home insurance company writes insurance policies to cover losses from fire, theft, and vandalism. In a recent financial review, managers discovered that company performance was lagging behind projections. They examined pricing and claims history in more detail and identified a group of about 10,000 customers whose claims far exceeded the collected premiums. Members of the actuarial group, whose compensation was partially tied to profitability of the policies they priced, were particularly frustrated. How would you recommend the insurer address this problem? Before continuing, first answer the following 3 questions to diagnose and solve the problem. Then, please elaborate in your answer to the question above. 1) Who is making the bad decision? 2) Do the actuaries have enough information to make a good decision? 3) Do the actuaries have the incentive to make a good decision?

Explanation / Answer

1) The bad decision is made by the insurance company, If they are insuring for fire, theft and vandalism, i assume that most of the damage was caused by theft and vandalism. This could be neigborhood problem, some localities have very high crime rate, The firm can reduce its presence in such areas and move to areas where such crime is not there

2) In case of theft and vandalism enough information is easy to get, This is because theft is reported both to the police and insurance company almost same time. So yes, the actuaries have enough information

3) They do not have any incentive to make good decision, The premium is collected and then the terms must be abided. The best thing is to increase the premium or not renew those claimed policies again.

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