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A major publication recently interviewed me about cell phone protection plan costs. The interviewer’s key question was, “Are protection plans really worth it?” To answer this, we discussed the following:
The Plan’s Projected Cost
This question is at the heart of the actuary’s expertise. Whether it is the price of an insurance product or the estimation of liabilities, actuaries estimate unknown costs.
Practicing actuaries are bound to codes and ethics, including those found in the Casualty Actuarial Society’s (CAS) Statement of Principles Regarding Property and Casualty Insurance Ratemaking. For estimating the price of a product, the actuary should generate a rate that is “reasonable and not excessive, inadequate, or unfairly discriminatory.” Hence, the rate would represent the expected costs plus a reasonable profit margin including a contingency provision in case actual future costs are systematically higher than the expected.
The Cost to the Consumer
First, let’s consider homeowners insurance on a home valued at $200,000. If the premium were $1,000, most consumers would find this price reasonable, thus a valuable product. However, if the premium were $200,000, I expect we would all reject this product since it offers no real value.
Now let’s apply this concept to a cell phone protection plan. A consumer purchases a $1,000 cell phone with a $150 service plan that covers the phone for the next two years. The consumer is thereby choosing a fixed cost of $1,150 instead of a variable cost of $1,000 plus any replacements required over the contract term. An individual on a fixed income might find the one-time payment convenient.
The Value to the Consumer
The consumer’s cost is going to be a contributing factor in determining the product’s overall value, but each consumer considers other individual factors which also contribute to that overall value. For example, a plan might offer benefits like no store visit with next-day mail replacement, no-hassle claim filing, phone-based technical support, the ability to switch from variable to fixed payments, etc.
With every product we buy comes an expected cost and a value proposition. Our individual purchasing decisions are always based on more than cost alone. Hence, “Is the protection plan worth it?” is in the eye of the buyer.
Chris Holt, ACAS, MAAA, is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the Atlanta, Georgia office. He holds a Master of Science Degree in Applied Mathematics from Florida State University and Master of Science and Bachelor of Science Degrees in Mathematics from Auburn University. He has over 18 years of actuarial experience in the property/casualty insurance industry. Chris has expertise in assignments involving loss reserving, loss cost projections, risk transfer analyses, and personal and commercial lines ratemaking.
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