Abstract for: A Competitor’s Strategy Unclothed: How Indirect Measurement Justified Not Fighting an Insurance Price War

The nonprofit Massachusetts Interlocal Insurance Association (MIIA) offers insurance to cities and towns, even when it is unavailable commercially. But earlier, a commercial agency was offering very low premium rates, which had driven all other competitors from the market. He had reached twice MIIA’s market share, threatening to become the “emperor” of this market. MIIA had lowered rates also, threatening its financial reserves. But how could the competitor offer even lower prices? What did MIIA need to do to stay in business? Traditional actuarial analyses couldn’t answer these questions, but dynamic modeling might. There was good data about MIIA, and sufficient data about the competitor, often estimated from corresponding MIIA characteristics. Competitive intelligence and indirect measurement completed parameterization, and supported robust policy recommendations. In the simulations, the competitor had very small reserves, and claims already in process would burn through what little reserves the low-price strategy had created. That would require abandoning the market. This emperor really had no clothes. Collateral analysis showed that customers were not inherently sensitive to moderate price differences. Thus encouraged, MIIA began raising its rates, and the competitor’s insurers indeed left the market. MIIA’s customers continued to get insurance at a stable, reasonable rates.