Abstract
The main objective of this paper is to show how the use of actuarial models and techniques may make a significant contribution when pricing reinsurance.
We focus our attention on treaty excess of loss reinsurance pricing which is one of the most complex types of reinsurance since several components need to be taken into account: primary policy limits and deductibles, multiple lines of business covered by the same contract and loss sensitive features that vary with the loss experience of the treaty. When the treaty includes loss sensitive features not only are the losses random variables but also the premium and expenses become random variables that depend on the aggregate losses. Therefore the profitability of the risk can only be assessed in terms of expected values of these features.
The objective of the paper is not to develop methods to estimate the expected losses to the treaty but rather to take a selected expected loss (calculated based on exposure and experience methods) and develop an aggregate loss distribution based on a severity distribution that allows us to incorporate all the characteristics of the treaty, i.e. policy limits and deductibles, multiple lines of business and reinsurance layer and attachment. The severity curve is developed based on an exposure rating approach. We compare our approach with other commonly used approaches in practice and show the differences in the results. Worked examples based on practical cases are shown in Section 4.
We focus our attention on treaty excess of loss reinsurance pricing which is one of the most complex types of reinsurance since several components need to be taken into account: primary policy limits and deductibles, multiple lines of business covered by the same contract and loss sensitive features that vary with the loss experience of the treaty. When the treaty includes loss sensitive features not only are the losses random variables but also the premium and expenses become random variables that depend on the aggregate losses. Therefore the profitability of the risk can only be assessed in terms of expected values of these features.
The objective of the paper is not to develop methods to estimate the expected losses to the treaty but rather to take a selected expected loss (calculated based on exposure and experience methods) and develop an aggregate loss distribution based on a severity distribution that allows us to incorporate all the characteristics of the treaty, i.e. policy limits and deductibles, multiple lines of business and reinsurance layer and attachment. The severity curve is developed based on an exposure rating approach. We compare our approach with other commonly used approaches in practice and show the differences in the results. Worked examples based on practical cases are shown in Section 4.
Year
2002
Publications
GIRO Convention
