Exposure to risk and zero accident claims in automobile insurance

Bolance, C., Guillén, M., Nielsen, J. P. & Thuring, F. (2018). Exposure to risk and zero accident claims in automobile insurance. Risks,

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Prospective customers of financial and insurance products can be targeted based on the profit the provider expects to earn from them. We present a model for individual expected profit and two alternatives for calculating optimal personalized prices that maximize the expected profit. For one of these alternatives, we obtain a closed-form expression for the price offered to each prospective customer; for the other, we need to use a numerical approximation. In both approaches, the profits generated by prospective customers are not immediately observed, given that the products sold by these companies have a risk component. We assume that willingness to pay is heterogeneous and apply our methodology using real data from a European insurance company. Our study indicates that a substantial boost in profits can be expected when applying the simplest optimal pricing method proposed.

Item Type: Article
Additional Information: This article is published under a Creative Commons Attribution License, CC-BY.
Divisions: Cass Business School > Faculty of Actuarial Science & Insurance
URI: http://openaccess.city.ac.uk/id/eprint/19163

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