SA3 Sept '21 Marking 3(x) - Mileage-based-pricing

[Edwin Livesey]

Hi all,

I would like to understand why I did not get the marks I was expecting for this question.

"Discuss the advantages and disadvantages of a pricing approach where the premium varies directly based on the number of miles driven."

My answer:

Advantages
1 - [customer] Customers may see it as fairer to have their premium based on miles driven.
2 - [insurer] This pricing approach is quite innovative (although ByMiles’s approach is rapidly being copied in the UK), so may reflect well upon the company’s reputation.
3 - [regulator] – the regulator may consider these product innovations to add healthy competition to the market.

Disadvantages
4 - [insurer] The risk of fire and theft is not related to the number of miles driven, and is therefore not captured in the premium – potentially resulting in anti-selection.
5 - [insurer] There will need to be a lot of administration and expense to calculate, charge and collect varying premiums each month.
6 - [insurer] There is credit risk from the insured not paying the premiums – which are monthly due to the mileage-based pricing approach.
7 - [policyholder] Customers tend to prefer known monthly expenditure, whereas the pricing method means these premiums vary – an indeed may synchronise with other expenses associated with long journeys – exacerbating the effect.
8 - [insurer & policyholder] If the equipment fails for any reason, the premium will be unknown.
9 - [insurer & policyholder] If the policyholder changes vehicle then the equipment will have to be refitted.

I would consider all of these points to be true, relevant and not insignificant.

I did consider that perhaps 5 & 6 unnecessarily relied on the assumption that pricing based on miles driven would mean that premiums would need to be paid monthly. However, the marking scheme makes the same assumption too, so clearly this is acceptable.

[4] should read "properly captured". But aside from that, I don't understand why each of these points does not score marks.

Can anyone help me?

Marking scheme:

Motor pricing normally takes account of mileage, so this approach is not entirely different but does involve a more direct relationship [1]
Simpler to price [1]

Advantages of direct relationship (either insurer or policyholder)
A - Fully transparent for policyholder, while quotes based on expected mileage can be uncertain [1]
B - Policyholders may not know their typical mileage [1]
C - or may have a lifestyle change during the policy term that changes their usage [1]
D - Risk of claims being disputed if there is a significant discrepancy in mileage even if unintentional [1]
E - At inception, policyholders may provide a higher estimated mileage to avoid the risk of being under-insured or having their claim disputed with a traditional model [1]
F - or feel restricted in increasing their usage in case they exceed estimated mileage [1]
G - Policyholder may have some control over level of use and hence associated pricing [1]

Disadvantages of direct relationship (either insurer or policyholder)
H - Typical motor pricing recognises that increased vehicle miles are generally associated with more experienced drivers so can allow for the risk relationship to be non-linear [1]
I - Uncertainty in monthly premium amounts for policyholders [1]
J - May be difficult for policyholders to compare true cost against other traditional policies [1]
K - Policyholders may be put off using their vehicle as much due to direct charging [1]
L - Potential technology limitations in capturing mileage accurately

 

[Jammy]

Below are my thoughts:

Advantages:
- number of points is quite low
- 2 & 3 seem more like fringe points, wouldn't make it to the most imp 10-15 ideas to discuss on this topic of "pricing approach"
- 1 mark in total for advantages

Disadvantages:
- H (in marking scheme) seems quite important point to cover, but absent in your answer
- J, K & L display practical thinking better than the disadvantages you have
- How important is the point on credit risk? If 1 month's premium is not paid, would the cover pause next month until dues are received? If this is the case, this wouldn't be the most material issue, but still worth mentioning I reckon
- I reckon you could be scored the full marks less 1 out of the total available marks on disadvantages. Less 1 to reflect missing out on H.

 

[Edwin Livesey]

Thanks Jammy for your response.

I would argue that [3] is of significance, and that any regulator is likely to have a keen interest in insurers competing in the personal lines motor insurance market with such a simplified pricing approach. e.g.
- in the UK, the FCA has intervened in the market with the Pricing Remedy
- and have said that complex pricing techniques are unlikely to be consistent with their new Consumer Duty regulation
- EC / EIOPA have proposals for regulating AI and there is a UK working party with this on the agenda
A simplified approach to pricing where the premium varies directly based on the number of miles driven would appear to sit well with this aims of the regulator.

In the UK, if a monthly premium is not paid, then I believe the insurer must give 7 days notice before cancelling the policy. But in practice, to avoid complaints / cancelling policies where the customer would catch up, the insurer will give some additional leeway. I think it's possible for there to exist exposure periods that have not been paid for - plus the administration required (e.g. MID submissions).

For information, I was awarded 1 mark out of 6 for my answer. Given that [7] must surely pick up a mark as it is effectively , I'm reading that not a single other point was deemed worthy of a mark.

 

[Jammy]

Thanks Edwin.

Noted on the other points. I fail to see any rationale for awarding 1 out of 6 marks for your solution. It leads me to believe that the only 1 point exactly on marking scheme has been marked, while rest not awarded as they were not present on the marking scheme.
This approach to marking is only used for bookwork questions, as far as I understand. Would this one qualify as a bookwork question?

 

[Autodidactuary]

Hi Edwin,

Did both of your markers (including a third if it got to that stage) award you 1 out of 6?

 

[Edwin Livesey]

Hi Jammy,

The General Comments section of examiner's report states: "Candidates who give well-reasoned points relevant to the specific question being asked, which are not in the marking schedule, are awarded marks for doing so." This would appear to cover all questions.

However, at the bottom of most sections in the solutions there is often a comment such as "other relevant points [1]", which perhaps indicates marks are not to be awarded outside the marking scheme for question 3[x].

 

[Edwin Livesey]

Hi Autodidactuary,

In total, marker 1 awarded 60, marker 2 awarded 69. The pass mark was 65, so it went for script review, which awarded 61.

For 3(x), marker 1 awarded 1, marker 2 awarded 2 and script reviewer awarded 1.