Issue: Risk-Based Pricing
The availability of data for insurers has not only reduced the amount that lower-risk policy holders have to pay, it also incentivizes existing high-risk policy holders to adjust their behaviors in exchange for lower insurance costs.
Moreover, if today’s insurers are restricted from using certain risk characteristics or rating variables, large tech companies that already collect large amounts of data may make moves to enter the insurance market, leaving current insurers at a competitive disadvantage.
The Future of American Risk & Insurance (FAIR) campaign is educating stakeholders on the importance of risk-based pricing in its five-part video series.
In this segment of Triple-I’s five-part video series, Dr. Charles Nyce, Associate Professor of Risk Management and Insurance at Florida State University, explains how the democratization of big data in insurance now will lead to safer behaviors and preempt higher insurance premiums down the line.
Insurance is a market just like any other good or financial product — firms compete to provide the best “product” and offer the lowest price to attract consumers.
Innovation plays the same role for insurance as it does for any other market. Restrictions on insurers’use of data will hinder risk-assessment ability and lead to artificially high premiums.
The market inefficiency created by restrictions on insurers’ ability to analyze risk data reduces the incentive for policyholders to engage in lower-risk behavior and leads to higher premiums.
Earlier in the summer, the Future of American Risk & Insurance (FAIR) campaign released a five-part video series educating stakeholders on the importance of risk-based pricing.
In this latest segment, Dr. Charles Nyce, Associate Professor of Risk Management and Insurance at Florida State University, discusses the importance of innovation in insurance markets, and how advances in data analytics for insurers will benefit society overall.
The Washington state Insurance Commissioner’s ban on insurer use of credit scoring could result in higher insurance costs for the state’s lower-risk policyholders, according to a recent editorial in The Daily Herald in Everett, Wash.
Written by the Professional Insurance Agents Western Alliance’s Executive Vice President, the editorial explores the unintended consequences of the Commissioner’s policy decision. In fact, Washington’s state lawmakers were unwilling to enact what the Commissioner imposed unilaterally.
Dr. Charles Nyce, Professor of Risk Management and Insurance at Florida State University, explained in a recent video the types of information insurers need to make sure lower-risk policyholders pay less for coverage, and vice versa.
Policyholders who pose lower risks to insurers generally benefit financially by paying lower premiums. Auto insurance is a perfect example, as drivers with a safe driving record are rewarded through lower prices.
That’s what incentivizes many policyholders to behave in a less risky manner. It’s also what some insurance experts call “internalizing the cost of risk for social good.”
The Future of American Risk & Insurance (FAIR) is bringing clarity to the subject of risk-based pricing in an ongoing educational video series.
In this segment, Dr. Charles Nyce, Florida State University Associate Professor of Risk Management and Insurance, explains how restricting insurer use of either certain risk characteristics or rating variables when pricing policies carries the risk of reducing some of the social good that insurance provides.
The Future of American Risk & Insurance (FAIR) is taking our subscribers back to school this week to understand how lower-risk policyholders subsidize higher-risk policyholders in markets where the risk-based pricing of insurance products is either discouraged or disallowed.
In this initial segment of what will be a FAIR video series, Dr. Charles Nyce of Florida State University (FSU) explains how insurers’ rigorous data analysis allows them to understand the risks they are assuming on behalf of a policyholder and then price accurately the policies insurers sell. Both criteria must be met for risk-based pricing to exist.
Given the close regulatory scrutiny insurers face, the cost of insurance policies in the U.S. are neither excessive, inadequate, or unfairly discriminatory, he notes, while stressing risk-based pricing is essential to make sure lower-risk policyholders pay less.
Dr. Nyce is FSU’s Tallahassee, Fla.-based Robert L. Atkins Associate Professor of Risk Management and Insurance. In addition, he is the Associate Director for the Center for Risk Management Education and Research in the Department of Risk Management/Insurance, Real Estate and Legal Studies at Florida State University’s College of Business.
The video segment can be accessed below. For more information and resources, visit fairinsure.org
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Triple-I Launches FAIR 2.0
Good afternoon,
Building upon the success of its Future of American Insurance & Reinsurance (FAIR) campaign, the Insurance Information Institute (Triple-I) is unveiling today an updated FAIR 2.0 website.
The website’s address remains the same—fairinsure.org—yet its future content will be expanding to other topical issues beyond pandemic-related business income (interruption) insurance matters.
To start, FAIR 2.0 will now address growing interest surrounding risk-based pricing of insurance products with educational resources such as fact sheets and blog posts, in addition to longer white papers.
In the coming months, the Triple-I will subsequently expand FAIR 2.0’s website to include the latest news on insurer Environmental, Social, and Governance (ESG) initiatives and human-centered innovation.
The pandemic gave rise to the Triple-I’s FAIR campaign, but the insurance industry’s essential role in the U.S. economy is always evolving and we want to continue to be a resource to media, policymakers, and broader industry stakeholders.
FAIR 2.0 will tell that story.
Best,
Sean Kevelighan
President and Chief Executive Officer
Insurance Information Institute