Bad Risks and Profitability

[Jay Hecht <JayHecht@xxxxxxx>]

In a message dated 97-12-08 13:56:25 EST, you write:

<<
 This is also true, incidentally, of banks, who tend to make money on only a
 very small portion of their checking account clients.  These are yet two of
 many examples of why the unrelenting chorus of "let's have more competition
 and we'll all do better" is such bullshit.
  >>

Actually, you can make money on unprofitable risks - provided you charge
higher rates to reflect the higher variance in expected costs.  The non-
standard (i.e. risky) auto market is highly profitable for a number of
insurers (e.g. Progressive, Integon).  The problem is to keep the "better"
sub-standard risks from migrating to a preferred insurer.  Rates and risk
classifications should be designed (according to the actuaries) so that thet
are not "unfairly discriminatory" (actual wording of statute!).  So while
skimming preferred risks is desirable, it is not a necessary condition for
profitability - what is necessary is an understanding of the loss distribution
and associated expected value.

Jason