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Price and Profit Optimization for Financial Services

Author

Listed:
  • Catalina Bolancé

    (Department of Econometrics, Riskcenter-IREA, Universitat de Barcelona, Av. Diagonal, 690, 08034 Barcelona, Spain)

  • Montserrat Guillen

    (Department of Econometrics, Riskcenter-IREA, Universitat de Barcelona, Av. Diagonal, 690, 08034 Barcelona, Spain)

  • Jens Perch Nielsen

    (Cass Business School, City, University of London, 106 Bunhill Row, London EC1Y 8TZ, UK)

  • Fredrik Thuring

    (Cass Business School, City, University of London, 106 Bunhill Row, London EC1Y 8TZ, UK)

Abstract

Prospective customers of financial and insurance products can be targeted based on the profit the provider expects to earn from them. We present a model for individual expected profit and two alternatives for calculating optimal personalized prices that maximize the expected profit. For one of these alternatives, we obtain a closed-form expression for the price offered to each prospective customer; for the other, we need to use a numerical approximation. In both approaches, the profits generated by prospective customers are not immediately observed, given that the products sold by these companies have a risk component. We assume that willingness to pay is heterogeneous and apply our methodology using real data from a European insurance company. Our study indicates that a substantial boost in profits can be expected when applying the simplest optimal pricing method proposed.

Suggested Citation

  • Catalina Bolancé & Montserrat Guillen & Jens Perch Nielsen & Fredrik Thuring, 2018. "Price and Profit Optimization for Financial Services," Risks, MDPI, vol. 6(1), pages 1-12, February.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:1:p:9-:d:130922
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    References listed on IDEAS

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    Cited by:

    1. Himchan Jeong & Guojun Gan & Emiliano A. Valdez, 2018. "Association Rules for Understanding Policyholder Lapses," Risks, MDPI, vol. 6(3), pages 1-18, July.

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