Carrier Management recently published an article in three parts by James Lynch, chief actuary and vice president of Research and Information Services at the Insurance Information Institute, based largely on an actuarial paper authored by Irene Bass, a former Casualty Actuarial Society president and a former member of the American Academy of Actuaries’ board of directors.

The Bass paper, which asserts that Allstate’s new “Complementary Group Rating” (CGR) plan “does not possess key characteristics often associated with price optimization,” was written, according to its title page, “on behalf of Allstate Insurance Company.” Similarly, “Lynch was asked by Allstate officials to review and write about the plan,” the Carrier Management article introduction states. Both authors worked closely with Allstate in preparing their work and relied on Allstate for information in that process. These works, which cannot be viewed as independent analyses of Allstate’s rating methods, are reviewed below.

Bass says that CGR’s purpose is to:

Anyone who studies insurance ratemaking knows that a massive, expensive computer program like CGR is not needed to cap rate increases. That can be done independently of CGR and has been done that way for decades.

There are serious questions about capping. Capping necessarily moves the price away from the actuarial indication, and, of course, without capping there could be no premium reversals. Capping only makes actuarial sense if it is done as part of a transition program to ease the impact of a large rate increase. Rate decreases, on the other hand, should never be capped, as consumers find no difficulty in absorbing a fully realized, actuarially indicated rate reduction. If a rate decrease is thought to be too large, then better methods of applying credibility to the data, such as using a longer period of data or data from other sources, should be found and capping avoided.

Aside from offering a new technique for capping, Bass suggests that CGR provides an important advance in the age-old battle against “premium reversals.” Except there is no such battle, and premium reversal hardly qualifies as an important actuarial conundrum. You can type just about anything into the Google search engine and get 27,000 results. But if you search “‘auto insurance’ ‘premium reversals,'” Google is baffled, returning under 10 results. A search on the Casualty Actuarial Society website, where the tough and interesting actuarial questions are sure to be discussed, finds only one article that mentions it, an April 29, 2016 PowerPoint presentation co-authored by Bass that merely recaps the Bass paper discussed here.

The “premium reversal” problem has been invented as part of Allstate’s defense of the serious problems with CGR. Reversals may occur but, as Lynch acknowledges, “[t]hey are rare.” Even these rare reversals would be entirely extinct if insurers did not tamper with the actuarial indications; they only occur when the insurer decides to stray from the cost-based rate.