E
Edwin Livesey
Member
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:
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:
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