View Full Version : Skimming The Cream
X Double Prime
05-04-2010, 02:58 AM
What is meant by skimming the cream?
05-04-2010, 04:28 AM
In my understanding:
"Adverse selection": bad risks tend to seek insurance.
"Skimming the cream": insurer tend to seek good risk.
It is something like a kind of morale hazard of the insurer.
05-04-2010, 08:20 AM
When an insurer determines a new rating characteristic, they can choose to implement a set of classification levels with different rate adjustments, or they can leave rates alone and use the characteristic to alter UW guidelines to pursue/maintain the lower-risk insureds. The latter is skimming the cream.
Ya, when adverse selection takes place in a market place, the schmuck company is getting adversely selected against but there's always some company that benefits from it. That company we say is "Skimming the cream."
05-04-2010, 09:54 AM
If Company XYZ has a way to identify high risk customers that other companies do not, they can set their underwriting criteria and/or rating process to charge those risks more so that they either collect more $$ from them (making that segment more profitable) or those risks leave for one of the other companies since they will likely have a lower rate. Either way, Company XYZ's experience improves overall (i.e., is more profitable). This would be termed "adverse selection" for those other companies.
A similar sort of phenomenon occurs for a way to identify lower risk customers, with appropriate changes, but Company XYZ now attracts those lower risk customers from their competitors--that is, they are "skimming the cream".
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