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Pricing insurance policies with offsetting relationship

Published online by Cambridge University Press:  17 September 2021

Hamza Hanbali Open the ORCID record for Hamza Hanbali [Opens in a new window]
Hamza Hanbali*
Affiliation:
Department of Econometrics and Business Statistics, Monash University, Clayton VIC 3800, Australia
*
*Corresponding author. E-mail: hamza.hanbali@monash.edu
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Abstract

This paper investigates the benefits of incorporating diversification effects into the pricing process of insurance policies from two different business lines. The paper shows that, for the same risk reduction, insurers pricing policies jointly can have a competitive advantage over those pricing them separately. However, the choice of competitiveness constrains the underwriting flexibility of joint pricers. The paper goes a step further by modelling explicitly the relationship between premiums and the number of customers in each line. Using the total collected premiums as a criterion to compare the competing strategies, the paper provides conditions for the optimal pricing decision based on policyholders’ sensitivity to price discounts. The results are illustrated for a portfolio of annuities and assurances. Further, using non-life data from the Brazilian insurance market, an empirical exploration shows that most pairs satisfy the condition for being priced jointly, even when pairwise correlations are high.

Keywords

Pricing decisionMultiple business linesCompetitivenessG22L10D81
Type
Original Research Paper
Information
Annals of Actuarial Science , Volume 16 , Issue 2 , July 2022 , pp. 261 - 287
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of Institute and Faculty of Actuaries

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