Extending the Asset Share Model: Recognizing the Value of Options in P&C Insurance Rates

In this paper we will present a refinement of the well-known asset share model for ratemaking. The new method for calculating premiums and premium relativities accounts for risk classification transition probabilities. The relationship between risk class transition and options on insurance coverage is discussed. Some simple examples will be worked which will demonstrate how risk class transition can cause problems for the traditional asset share model which are remedied by our extended asset share model. We will also show how the new method can be used to determine the price for insurance policies with the popular “accident forgiveness” feature.

Keywords: Ratemaking, risk classification, asset share model, option pricing