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Fudge: Bias in Group Pricing in South Africa

Disability has proven to show volatile loss ratios for group insurers in recent years.


While socioeconomic forces play a role, overuse of certain pricing approaches can also contribute. We liken this phenomenon to "fudging", or the practice of taking mental shortcuts to adjust pricing assumptions. The result seems sweet, but can carry a bitter cost. 

To understand why actuaries fudge, only consider today’s high-stakes, high-pressure business environment. Far too often, individuals selectively credit evidence that confirms a desired conclusion, while discrediting evidence that does not – an often unconscious decision-making process called motivated reasoning. 

One doesn’t need to look far for examples: consider ardent sports fans from two opposing teams. Despite watching the same game, both sides believe that the umpire is biased. How many times have you kindly offered the umpire your glasses? Perhaps some decisions truly are unbelievable. 

As noted earlier, when it comes to the group insurance market, misleading – or fudged – pricing decisions can deliver bitter results.

Here are nine decidedly unsweet pricing fallacies to avoid:  

Table Mountain Error
Artificial Credibility
Herd Pricing
Narrow Selection
Duration Shorting
Overweighing Light Year
Price Anchor
Reversion Expectency
Outstanding Claims Reserve

All nine fallacies present alluring temptations, and discipline is key. While the pressure to remain competitive is a reality,  the industry should guard against unconscious bias and motivated reasoning when pricing group business. Contact RGA South Africa to learn more about group risk pricing. 
Download "Fudge"

The Authors

  • Didi de Kock
    Group Risk Actuary
    RGA South Africa
  • Neil Parkin
    Chief Pricing Actuary
    RGA South Africa

Summary

RGA South Africa shares nine group disability pricing fallacies that can lead to problems. While the pressure to remain competitive is a reality,  the industry should guard against unconscious bias and motivated reasoning. Contact RGA South Africa to learn more about group risk pricing. 
Download "Fudge"
  • de Klock
  • de Kock
  • Didi de Kock
  • group clams management
  • group commoditization insurance
  • group insurance pricing
  • group pricing insurance
  • group protablity
  • group risk assessment
  • group underwriting considerations
  • group value added services insurance
  • Neil Parkin
  • Parkin