CS-25 - Pricing to Avoid the Winner's Curse

The traditional actuarial approach to setting a price for insurance may invite what auction theorists call "the winner's curse"; a shortfall in expected profit below what the actuary projected. To avoid the winner's curse, careful attention should be paid to the required profit load and actuarial profit margin.

Learning Objectives:
• Recognize different types of auction.
• Explain the winner's curse and its relevance to the sale of insurance.
• Define bidding functions and use them to set a price that achieves target profit in a simple insurance pricing problem.
• Explain the winner's curse and its relevance to the sale of insurance.