Question

A large, well-established home insurance company writes insurance policies to cover losses from fire, theft, and vandalism. In a recent financial review, managers discovered that company performance was lagging behind projections. They examined pricing and claims history in more detail and identified a group of about 10,000 customers whose claims far exceeded the collected premiums. Members of the actuarial group, whose compensation was partially tied to profitability of the policies they priced, were particularly frustrated. How would you recommend the insurer address this problem?

Before continuing, first answer the following 3 questions to diagnose and solve the problem. Then, please elaborate in your answer to the question above.

1) Who is making the bad decision?

2) Do the actuaries have enough information to make a good decision?

3) Do the actuaries have the incentive to make a good decision?

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1) Who is making the bad decision?
The managers, especially those responsible for designing the compensation structure in the company, are the ones making the bad decision. They include top management such as the chief executive officer, directors and human resource managers. This is...

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