The Perils Of Copycat Ratemaking
Insurers with less-sophisticated data tools might see “imitation”
as a solution—but costs, risks may outweigh benefits
■ PRICING PLAGIARISM
BY DAVID CUMMINGS
IT IS A time-honored practice in insur- ance ratemaking for insurers to study their competitors’ rates. And, because
of rate regulation, competitors’ price information is a matter of public record.
By maintaining awareness of rate activity, an insurer can identify opportunities to
achieve competitive advantage by balancing the actuarial component of its rates
with knowledge of the market position. For
many companies, the filings of leading insurers provide a view of pricing innovations
and more-sophisticated rate structures.
Since the early 1990s, when new data
and analytical-ratemaking techniques were
introduced to personal-lines insurance, increased pricing sophistication among leading carriers has created a growing divide
between the technological “haves” and
“have nots.” Many lagging insurers are trying to bridge the gap by copying the rate
structures of leading carriers, resulting in
an explosion of copycat ratemaking.
It’s easy to understand why an insurer
with a less-sophisticated rate structure might
see imitation ratemaking as a convenient
solution. To develop its own pricing enhancements, a company requires significant
resources, including data sources and analytical expertise that the insurer may not have.
By emulating a leading carrier, the insurer seems assured of a competitive pricing
position without committing the upfront resources needed to develop and implement a
new rate plan. But imitation ratemaking has
many costs and considerable business risks.
THE COSTS OF COPYING
Rate filings are publicly available, but
that does not mean they’re free. When
an insurer decides to emulate rates, it is
committing substantial capital to build a
There are costs involved in obtaining rate
filings and monitoring filings for updates.
But the most significant costs come from
interpreting the filings and compiling them
in a form that the copycat company can use.
The leading carriers are fully aware of
copycats, so they do what they can to make
it difficult to assemble a fully operational rate
plan from their filings. These days, they don’t
even need to try very hard because rating
plans are becoming increasingly complex.
As a result, it takes considerable effort
to import, assemble and restructure the
elements of a rate plan so it is operational
in an imitation-rating system. This time
and effort must be expended for each state
in which the insurer writes. In the end, the
emulating insurer must devote many people and systems to make copying possible.
But even if successful in cracking the code
and accurately assembling the information
from the filing, some elements are often
missed. Several aspects of the leading competitor’s rate plan may be confidential and
not available to the public.
For example, the details of tiering plans
and company-placement guidelines are
not filed or made public in many states.
The laws in certain states specifically pro-
tect proprietary credit-based insurance
scores from public disclosure.
INVITATION FOR PRICING RISK
Imitating another insurer’s rates exposes
the copycat to one of the most deadly
business risks in insurance: namely, pricing risk—the risk that rates do not match
the costs to provide insurance coverage.
By replicating rates, the copycat implicitly assumes that its cost structure will also
mimic the costs assumed in those rates.
A former underwriting executive told
me of a time he was pressured to simply
copy a leading carrier’s rates. He responded,
“Are we also going to copy that carrier’s
claims-handling infrastructure, their claim-
settlement practices, their underwriting
costs, their agency-compensation plan and
their target markets? If not, then it doesn’t
make sense to copy their rates.”
As the statement illustrates, costs be-
tween two companies may differ significant-
ly in a variety of ways. It’s almost impossible
for an outsider to know enough about a
competitor’s cost structure to make adequate
comparisons. By adopting a competitor’s
rate plan, the copycat may not be collecting
enough premium to cover actual costs.