An Exposure Rating Approach to Pricing Property Excess-of-Loss Reinsurance

Included in the 1963 Proceedings is the paper "Rating by Layer of Insurance", by Ruth Saltzmann. In her paper, Salzmann examines the relationship between homeowners fire losses and the corresponding amount of insurance. Using 1960 accident year data from INA, each homeowner fire claim was rationed to the amount of insurance on the policy affording the coverage. An accumulated loss cost distribution by percentage of insured value was then developed. These distributions can be (and indeed still are) used to exposure rate property excess of loss reinsurance. In order to determine whether the relationship between sizes of loss and amount of insurance is a stable one over time, Salzmann’s methodology has been applied to a more current set of data (Hartford Insurance Group Homeowners losses for accident years 1984-88). Any changes in this relationship over time would have obvious implications for any reinsurer currently using Salzmann’s Tables to exposure rate property excess of loss reinsurance. Salzmann’s methodology has also been applied to The Hartford’s small commercial property book of business, in order to determine whether the commercial property relationships of loss size to amount of insurance differ from those of homeowners. Reinsurance Research - Pricing/Contract Design