A Note on the Gap Between Target and Expected Underwriting Profit Margins [Discussion]

Dr. Venezian's paper provides a simple yet powerful result: the traditional actuarial pricing method produces an expected underwriting profit margin that is lower than the target margin. This will not be avoided by an unbiased projection of losses; as long as there is uncertainty in that projection, the results follow. This uncertainty in the projection of loss costs is parameter risk. The loading in rates for profit and contingencies should reflect the parameter risk assumed by the insurer, at least in the contingencies part. Unfortunately, an appropriate loading for parameter risk is usually not susceptible to an easy statistical measure. Dr. Venezian's theorem leads to a natural method for quantifying that loading. This review uses that method to calculate a contingencies loading for workers compensation rates. Keyword: Profit Factor