Ch 19: Pricing (individual contracts)

Question 1

What is the risk premium

Answer 1

Element of the premium required to cover only the expected claim amount

Question 2

Process for deriving the risk premium

Answer 2

• Choose base period over which to collect claims and exposure data
• Collect data, checking accuracy and appropriateness of the data
• Split data into homogeneous groups
• Calculate historical burning cost premium for each group
• Analyze the data (identify trends)
• Adjust and project forward to obtain future risk premiums (i.e. expected claim amount over the period that policies covered by the premium rates will be in force

Question 3

Why should data be split into risk cells (i.e. homogeneous subsets)

Answer 3

• Enable greater understanding of the risk profile of each policyholder risk class and procedure/benefit
• Help reduce exposure to changes in business mix by ensuring that dangers of cross-subsidies are avoided.

Question 4

Burning cost premium (BCP) description

Answer 4

• True past risk premium of an actual portfolio of data (i.e. actual cost of claims incurred per policy or per unit of exposure)
• Common starting point in calculation of risk premiums
• BCP = (Sum of all claims)/(Total exposed to risk)
• Or BCP = Average claim amount * Claims incidence rate (assumes unit of exposure is one policy)